The Bank of Korea's monetary policy board on Thursday elected to cut the nation's benchmark interest rate by 25 basis points, from 3.00 percent to 2.75 percent.
Most analysts were expecting a rate cut - even though inflation climbed up to 2.0 percent on year in September, up from the 12-year low of 1.2 percent in August. CPI also crept back into the central bank's target range of 2 to 4 percent.
"Growth has continued to slow in emerging market countries as well, due mostly to the impact of the economic slumps in advanced countries," the bank said in a statement accompanying the decision. "The committee expects the pace of global economic recovery to be very modest going forward and judges the downside risks to growth to be large."
Inflation was up 0.7 percent on month after adding 0.4 percent in the previous month. Core CPI was up 1.4 percent on year and 0.1 percent on month after rising 1.3 percent on year and 0.2 percent on month in August.
Also, producer prices in South Korea climbed 0.7 percent on month in September, unchanged from the August reading. On year, producer prices were up 1.0 percent after rising 0.3 percent in the previous month.
"The committee forecasts that inflation will remain below the 3.0 percent midpoint of its target for the time being, owing primarily to the easing of demand-side pressures and despite the influence for example of international grain price instability," the bank said. "As for housing prices, those in Seoul and its surrounding areas declined at a somewhat faster pace, and those in the rest of the country generally stabilized at their levels of the previous month."
Recent economic data also provided some support for a rate cut as South Korea's exports declined sharply in August, adding to signs that the economy is losing momentum as the European debt crisis cripples external demand.
The central bank had surprised analysts three months ago with a 25-basis point cut after 12 straight meetings with no change.
"In the financial markets, stock prices have risen and the Korean won has appreciated against the U.S. dollar, due mostly to the improvement in international financial market conditions and to inflows of foreigners' securities investment funds in consequence of the additional quantitative easing policies of major advanced countries," the bank said.
In addition, the Monetary Policy Committee has set the inflation target for 2013 onwards at the range between 2.5 and 3.5 percent, in terms of the rate of change in the consumer price index. The Bank of Korea will publish a comprehensive report on inflation twice a year, to explain price developments, future inflation forecasts and conditions, the monetary policy stance and so on.
The period over which the new inflation target will be applied is three years from 2013 to 2015. In consideration of monetary policy continuity, the committee will set the next target prior to expiration of this target period at the end of 2015.
"Looking ahead, the committee will closely monitor external risk factors and the consequent changes in financial and economic conditions at home and abroad, and conduct monetary policy so as to stabilize consumer price inflation at the inflation target over a medium-term horizon while continuing its efforts to lower inflation expectations and ensuring that the growth potential is not eroded," the bank said.
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