Brazil and South Korea cut rates amid economic gloom

The Central Bank of Brazil and the Bank of Korea have both announced cuts to their main policy interest rates, with South Korea lowering the benchmark rate by 25 basis points to 3% and Brazil by 50bp to 8%.

Both central banks cited the weak outlook for the global economy as a major reason behind the decisions. "The committee appraises the trend of economic growth to have weakened more than originally anticipated," the Bank of Korea said. The central bank also referred to signs of deterioration in the US economy, weakness in the eurozone and the possibility of "international financial market unrest" as downside risks facing the economy.

The Central Bank of Brazil similarly noted fragilities in the global economy, and said that inflationary risks are limited. In the latest quarterly inflation report, published in June, the central bank revised its GDP forecast for 2012 down by 1 percentage point, to 2.5%.

For Brazil, the cuts are the latest in a string of interest rate reductions. The central bank has cut the headline Selic rate in each of the past eight monetary policy meetings, a total fall of 4.5 percentage points since July last year.

By contrast, the Korean cuts are the first since 2009. The central bank last cut the base rate in February 2009, but over the following years steadily raised the rate to a peak of 3.25% in June 2011, where it remained until the most recent cut.

The Bank of Korea suggested that weak inflationary pressures were likely to continue. "The committee forecasts that inflation will remain below the midpoint of the inflation target for the time being, despite pressures to hike public utility fees."