* Base rate cut to 2.25 pct vs 2.50 pct (Reuters poll 2.25
* Rate cut seen in line with govt policy to boost growth
* Bank of Korea's independence in question
* Slim majority see hike as next move: Reuters snap poll
(Adds snap poll, updates markets)
By Christine Kim and Choonsik Yoo
SEOUL, Aug 14 South Korea's central bank cut the
benchmark interest rate for the first time in 15 months on
Thursday, a dramatic shift from its hawkish policy stance that
many analysts see as caving in to government pressure to shore
up faltering growth.
The Bank of Korea's monetary policy committee cut its base
rate by 25 basis points to 2.25 percent, citing
weak sentiment among the consumers and companies. One of the
seven members dissented and voted to keep the rate unchanged.
The cut was widely predicted by economists, many of whom
revised their rate calls in recent weeks after new Finance
Minister Choi Kyung-hwan last month launched a series of
stimulus measures to spark activity, and placed overt pressure
on the central bank to ease policy.
The rapid turnaround in the central bank's stance, which
until a month ago had kept markets primed for a rate hike as the
next move, has raised uncomfortable questions about its
"The question of central bank independence is an age-old
one, especially for Korea," said Wellian Wiranto, economist at
OCBC Bank in Singapore, referring to the growing controversy
over the Bank of Korea's independence.
"Would the BOK have cut rate today if there wasn't as loud a
chorus for monetary policy accommodation as it happened? Perhaps
it would have in any case, but it might have waited one or two
more meetings to establish whether business sentiment can get
past the Sewol effect."
The Sewol ferry sank in mid-April, killing more than 300
people in the country's worst maritime accident in two decades,
darkening the public mood and hurting a broad swathe of
Bond futures fell and the won rose sharply as Bank of
Korea Governor Lee Ju-yeol adopted a generally neutral policy
stance, which disappointed some who had expected a more dovish
A slim majority of 19 analysts surveyed by Reuters late on
Thursday predicted there would be no further cut in the
benchmark rate, but 7 of the analysts still expected another
policy easing in the coming months - a sign of the marked
reversal in sentiment in recent weeks.
BOK DEFENDS MOVE AS GOVT PUSHES FOR GROWTH
Governor Lee, who promised to beef up the central bank's
image as an independent interest rate-setter when he took office
in April, declined to respond to questions at the news
conference on whether he felt pressured from outside.
However, in the policy statement accompanying the rate cut,
Lee tried to quell doubts about the central bank's independence,
and hinted of his frustrations at having to defend his
"There has been much talk (outside the central bank) about
interest rates, which I find undesirable. If this occurs
frequently, then the public may start doubting the neutrality of
the central bank. Remarks that pressure the central bank are
also undesirable," Lee said.
"We will try to build public trust through our future policy
meetings. Even if it takes time that is the right way."
It was the first rate cut since May last year, which was
also seen as cooperating with the government under a different
governor. The cut brought the base rate, which applies to the
central bank's seven-day repurchase agreements, to its lowest
since early November 2010.
In a Reuters survey conducted before Thursday, 27 of 31
analysts forecast a cut while the remaining four saw no change.
Nine of the 27 analysts had predicted another reduction in the
rate while 14 expected the next move to be a hike.
Governor Lee acknowledged that the latest rate cut would
lift the already heavy household debt burden, but expected this
to be offset by the effects from an improving household balance
sheet after the government's stimulus measures.
Most analysts agreed the monetary easing would be positive
for the economy.
"I think the rate cut can bring a positive effect on the
housing markets. There was depressed demand in the housing
markets due to the unstable market situation," said Kim Jong-su,
economist at Taurus Investment & Securities.
Second quarter growth in South Korea slowed to its weakest
pace in over a year, rising just 0.6 percent on a seasonally
adjusted basis, as momentum in Asia's fourth-largest economy
cooled amid tepid exports and anaemic domestic consumption.
The Bank of Korea currently sees the economy expanding by
3.8 percent this year from 3.0 percent last year - a welcome
pick up but still lingering below growth rates seen before the
2008-2009 global financial crisis.
Stimulus measures introduced by Choi over the past month
included $11 billion in public spending plans, easing of
mortgage curbs, a new lending facility for small companies and
plans to develop seven major service industries.
The Bank of Korea expects economic growth to pick up from
the current quarter, but Choi has said the underlying weakness
of the economy was more serious than the headline figures
Consumer inflation has stayed below the lower end of the
central bank's 2.5-3.5 percent target band for two years thanks
to a combination of stable global commodities prices, a
strengthening won and weak consumer demand.
(Editing by Shri Navaratnam)