South Korea's central bank cut its base rate by 25 basis points to 2.25 percent, as expected, and said it would closely monitor external risks, such as shifts in the monetary policies of major countries, changes in investors' sentiment, movements in economic indicators, including the trend in household debt, along with the impact of the rate cut and government policies.
The Bank of Korea (BOK), which cut its rate by 25 basis points last year, also said exports had maintained their buoyancy but "improvements in domestic demand, which had contracted mainly due to the impacts of the Sewol ferry accident, have been insufficient, and that the consumption and investment sentiments of economic agents also continue to show sluggishness."
The rate cut was widely expected due to weak consumer demand following the sinking of the Sewol ferry on April 16. The government has announced an 11.7 trillion won boost in spending and on July 20 a joint statement by Finance Minister Choi Kyung-hwan and BOK Governor Lee Ju-yeol called for harmony between economic and monetary policies.
Last month the BOK cut its growth forecast for this year to 3.8 percent from a previous 4.0 percent and the 2015 growth forecast to 4.0 percent from 4.2 percent and lowered its inflation projection to 1.9 percent from 2.1 percent.
South Korea's Gross Domestic Product expanded by 0.6 percent in the second quarter from the first quarter for annual growth of 3.6 percent, down from 3.9 percent.
The headline inflation rate eased to 1.6 percent in July, down from 1.7 percent in June, while core inflation rose by 2.2 percent, up from 2.1 percent. The unemployment rate in July fell to 3.4 percent from 3.6 percent the previous month.
"The Committee expects that the negative output gap in the domestic economy will gradually narrow going forward, although the pace of narrowing will be moderate," the BOK said, repeating its statement from last month.