South Korea cuts interest rate to record low while New Zealand holds

Fifty-thousand-won notes are piled up after being counted at a bank in Seoul — Bank of Korea has slashed the base rate to a record 1.75% REUTERS

The Bank of Korea has unexpectedly slashed the benchmark base rate by 25 basis points citing downside risks to inflation, sending the Korean won to a 20-month low and stocks higher. The Reserve Bank of New Zealand, however, held the official cash rate, as expected.

The BoK reduced the main rate to a record low of 1.75% at the 12 March review and said inflation will continue at a level lower than originally expected. The RBNZ kept the OCR at 3.5%.

The USD/KRW rose to 1135.90, its highest since July 2013 before falling below 1127 by 5:30 GMT amid improved risk sentiment.

The New Zealand dollar traded choppy on 12 March as the central bank projected inflation to be lower and kept the rates saying the domestic economy is strong. Overall greenback strength also weighed on the kiwi dollar.

The NZD/USD traded in a range of 0.7329-0.7272 compared to the previous close of 0.7293.

However, at 11 March's lowest of 0.7190, the Kiwi dollar almost matched the 4-1/2-year low of 0.7176 touched on 2 March, indicating the downside pressure on the currency.

The Korean currency also met a crucial support at the 12 March weakest point where the USD/KRW pair hit the upper resistance barrier of a downward channel that dates back to mid-2010.

South Korea's major share index Kospi traded 0.40% higher earlier in the day before slipping back below the previous close briefly on profit-taking but more or less held the green territory in the afternoon.

In Korea, consumer price inflation fell to 0.5% in February from 0.8% the month before dragged by a sharp decline in the prices of crude oil and other industrial products. Core inflation excluding agricultural and petroleum product prices has fallen to 2.3% from 2.4%.

South Korea has been on an easing cycle since 2012 when the base rate was 3.25%, which was reduced to 2.5% by the start of 2014. The BoK made a 50 basis points reduction last year and now the 2015 leg has begun with an additional 25 basis points on 12 March.