South Korea uncertain whether rebound in neutral interest rate will continue

Seoul, Nov 3 (IANS) The neutral interest rate in South Korea is estimated at between -0.2 per cent and 1.3 percent in the first quarter of the year, a report from the Bank of Korea (BOK) said on Sunday.

The report said the country's neutral interest rate has been on the decline since 2000 but rebounded slightly after the coronavirus pandemic.

More specifically, the neutral interest rate in Asia's fourth-largest economy was estimated at between 1.4 per cent and 3.1 per cent in the first quarter of 2000, but fell to between -1.1 per cent and 0.5 per cent in the first three months of 2020, according to the report.

The neutral interest rate, also dubbed natural interest rate, is usually known as the rate at which the economy is at full employment with stable inflation and a central bank's monetary policy stance is neither accommodative nor restrictive, reports Yonhap news agency.

The BOK report said it is uncertain whether the rebound in the country's neutral interest rate will continue down the road.

"The direction of the country's neutral interest rate will be determined by various factors," it said adding that the ageing population and productivity should be also reflected in the estimate.

Last month, South Korea's central bank slashed its key rate by a quarter percentage point to 3.25 per cent, the first rate cut in 38 months, amid slackening domestic demand and moderating inflation.

Meanwhile, the Bank of Korea's (BOK) first monetary policy pivot in 38 months demonstrated its shift of attention to how to prop up sagging domestic demand and boost growth momentum as inflationary pressure has markedly eased.

But any further rate cuts are unlikely at least for three months to come amid lingering concerns over rising home prices and household debts, officials and experts said.

The BOK lowered its benchmark interest rate by a quarter percentage point to 3.25 per cent to end its tightening cycle that began in August 2021.

The BOK had delivered rate hikes through January 2023 and kept the rate at 3.5 percent, the highest level in about 16 years. The last time it reduced the rate was May 2020.

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