South Korea lowers interest rates

South Korea's central bank has cut interest rates for the first time in 13 months in a move to boost the economy and stimulate weak domestic demand.

The Bank of Korea cut interest rates by a quarter of a percentage point to 3.5%, the first move since July 2003.

The central bank governor said the rate reduction was a pre-emptive move to offset the effects of higher prices.

But analysts expressed surprise at the rate cut, warning that the move could raise inflation.

"We never thought they would cut rates" said Hwang In-Seong, an economist at Samsung Economic Research Institute.

"Judging by the decision, we can say the economy is in really bad shape," he added.

Inflation risk

Bank of Korea governor Park Seung said the rate cut was a "pre-emptive measure" designed to "stimulate domestic demand depressed by high energy prices".

He added that steep oil prices would drain the South Korean economy, cutting the growth rate by one percentage point.

South Korea is very susceptible to rising oil prices. It imports all of its crude oil and is the world's fourth largest oil importer.

Analysts warned that cutting interest rates in South Korea could weaken the won, raising imports and fuelling inflation.

But while Park Seung admitted that inflationary pressure was "building up", he said the central bank had decided to give priority to boosting demand over fighting inflation.

South Korea is the third largest economy in Asia and the 11th largest economy in the world. The country has been recovering from a recession in 2003 following robust levels of exports - mainly to China.