Bank of Korea, Central Bank of Brazil Cut Rates
The Bank of Korea cut benchmark interest rates unexpectedly Thursday, slashing the rate from 3.25 percent to 3.0 percent. Economists had not been expecting a cut in rates, yet the cut marks the first time the Bank of Korea cut lowered rates since February 2009, citing slowdowns in Europe and Asia as drags on growth.
Brazil's central bank also cut rates overnight, slashing rates from 8.5 percent to 8.0 percent. “Given the fragility of the global economy, the contribution of the external environment has been deflationary until now,” the bank said in a statement. “At this moment, the monetary policy committee believes that the risks to the inflation outlook remain limited.”
The rate cuts from the two emerging markets follow other central banks in cutting rates. China has cut benchmark lending and deposit rates twice in the past two months, as economic output cools and lending growth slows. The Royal Bank of Australia has also cut rates twice in 2012.
Bank of Korea Governor Kim Chong-soo said in a statement: "We expect the rate cut will help the South Korean economy return to a long-term growth trend." The bank feared that without cutting rates, growth would have fallen below trend. The central bank said that some economic indicators in the U.S. have shown signs of deterioration and that the sluggishness of economic activities in the euro zone has deepened. Economic growth in South Korea will be weaker than previously expected as exports and domestic demand, two key growth engines, both remain at low levels.
Even though analysts had not expected the Korea rate cut, the Brazil rate cut was expected. Economists had forecast a 50 basis point cut correctly and forecast a further 50 basis point cut. The central bank has already cut rates 450 basis points since August.
Central banks, specifically in emerging markets, have been cutting rates as global growth slows. Many of these markets are tied to global trade and are dependent upon the world's three largest economies, the US, China, and the EU. As these three major economies continue to slow, export-dependent emerging markets have seen orders falling, hurting growth prospects. Central banks are cutting rates in hopes of spurring lending growth to avoid a further slowdown.
(c) 2013 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.