South Korea's central bank unexpectedly cut its benchmark interest rate by 25 basis points to 2.5 percent Thursday, altering the policy rate for the first time in seven months.
Bank of Korea (BOK) Governor Kim Choong-soo and monetary policy board members decided to cut the seven-day repurchase rate to 2.5 percent after freezing it at 2.75 percent in the prior month via a 4-3 vote. The seven-member committee lowered its borrowing costs by 25 basis points in July and October last year, reported Xinhua.
The decision was made unexpectedly as most market watchers predicted rate freeze due to the expected economic recovery from the supplementary budget plan and credit easing policy.
The Ministry of Strategy and Finance unveiled the supplementary budget plan worth 17.3 trillion won ($15 billion) that was passed through parliament Tuesday. The amount was the second-largest in the country's history.
The Korea Institute of Finance (KIF) expected the extra budget to raise the country's growth by 0.11 percentage point this year, saying that as much as 40 percent of the positive effect from the budget will be reflected in the 2013 GDP data. The remaining 60 percent effect was forecast to be realized in 2014.
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The BOK downgraded its 2013 growth outlook from 2.8 percent to 2.6 percent, while the finance ministry slashed its outlook from 3 percent to 2.3 percent.
The central bank expanded soft loans to small businesses at the April rate-setting meeting rather than cut the policy rate. Market watchers expected the BOK to maintain its wait-and-see stance to monitor the effect of the targeted credit-easing policy.