Seoul
South Korea’s neutral interest rate is estimated to be between -0.2% and 1.3% in the first quarter of the year. This figure reflects a slight rebound following a long-term decline since 2000, which saw the neutral rate drop significantly after the onset of the COVID-19 pandemic, According to a report on Sunday.
Historically, the neutral interest rate in South Korea was estimated at between 1.4% and 3.1% in early 2000. By the first quarter of 2020, it had fallen to between -1.1% and 0.5%. The neutral interest rate, often referred to as the natural interest rate, represents the level at which the economy operates at full employment with stable inflation, indicating a balanced monetary policy.
The BOK’s report expresses uncertainty about the sustainability of the recent rebound in the neutral interest rate, noting that its future direction will depend on various factors, including demographic changes and productivity trends.
Last month, the BOK cut its key interest rate by 25 basis points to 3.25%, marking the first reduction in 38 months. This decision was aimed at addressing sluggish domestic demand and easing inflation pressures. Despite this shift, further cuts are unlikely in the near term due to concerns over rising housing prices and household debt.
The BOK’s recent pivot from tightening to a more accommodative stance signals its focus on boosting economic growth while navigating the complexities of the current financial landscape.
