Bank of Korea joins global policy easing with surprise rate cut

By Christine Kim and Choonsik Yoo

SEOUL (Reuters) - South Korea's central bank cut interest rates for the first time in five months on Thursday in a surprise move, joining the ranks of other economies which have recently taken advantage of lower inflation to ease monetary policy to spur sluggish growth.

The Bank of Korea's monetary policy committee cut its base rate by 25 basis points to a record low of 1.75 percent, a media official said without elaborating.

Governor Lee Ju-yeol is due to hold a news conference from 11:20 a.m. (0220 GMT).

Bond futures rose and the won fell after the decision. Most economists polled by Reuters had expected no rate change at this meeting, though many had still predicted a cut in coming months if the country's economic recovery continued to struggle to gain traction.

"We think the two key drivers behind today's decision are a weaker economic outlook and deflation pressures," said Ronald Man, an economist at HSBC in Hong Kong.

"Our baseline scenario is for a further 25 basis point rate cut in Q3 2015, which will bring the policy rate down to 1.50 percent."

The Bank of Thailand also cut its policy interest rate on Wednesday in a surprise move. India has cut rates twice already so far this year and China has eased policy two times, with more moves expected. Singapore, Australia and Indonesia have also eased.

The Bank of Korea has been facing mounting pressure to lower borrowing costs in the past few weeks as indicators have shown little evidence that Asia's fourth-largest economy is on a rapid rebound.

January factory output declined at the fastest pace since December 2008, while exports suffered their worst fall in two years in February.

Members from the central bank's monetary policy committee also expressed concerns over the economic situation abroad, including the euro zone and China, in minutes from February's rate meeting released on Tuesday.

Some members highlighted poor exports at home and growing worries over possible deflation in the minutes.

Policymakers have taken a step back from positive talk earlier this year, with the finance minister recently noting the weakness in the economy's recovery and expressing concerns over persistently low inflation.

South Korea's annual inflation slowed to a 16-year low in February, though much of it was blamed on low commodity prices rather than weak consumption.

(Additional reporting by Yeawon Choi; Editing by Kim Coghill)