By Cynthia Kim and Jihoon Lee

SEOUL (Reuters) – South Korea's central bank cut interest rates for the first time since mid-2020 on Friday, signaling the possibility for further reductions, providing some relief to households facing the highest borrowing costs in 16 years.

The Bank of Korea (BOK) lowered its benchmark interest rate by a quarter percentage point to 3.25% during its monetary policy review, an outcome anticipated by 34 of 37 economists polled by Reuters.

BOK Governor Rhee Chang-yong stated that Friday's decision, backed 6-1 by board members, could be seen as a "hawkish cut," emphasizing that financial stability remains critical despite this reduction.

Rhee noted, "From where we stand now, (the policy interest rate) sits above our neutral interest level by any model, so there is room for further reductions," during a press conference following the rate decision.

When queried about whether further rate cuts would occur during the next policy review on Nov. 28, Rhee provided no specific guidance but indicated that over the next three months, six out of seven board members prefer to maintain steady rates.

Following the announcement, the won gained against the dollar, and policy-sensitive three-year treasury bond futures rose by 0.17 points to 105.96.

This rate cut aligns the BOK with other central banks in the U.S., U.K., European Union, and Canada, which have entered an easing cycle as global economic growth appears to slow and inflation diminishes.

The bank stated, "The moderate growth trend will continue, but uncertainties regarding the future path of output growth have heightened."

The country's gross domestic product contracted in the second quarter, with private consumption declining and headline inflation in September falling short of the bank’s 2% target.

Concerns regarding the hot housing markets and increasing household debt had delayed the bank's pivot in policy, but a recent cooling in transactions has given policymakers space to focus on stimulating growth.

Analysts believe the Bank of Korea will proceed cautiously with any further easing of borrowing costs, as managing property prices and household debt remain critical considerations.

ING senior economist Kang Min-joo mentioned in a client note, "The BOK seems to be well aware of the risks of rate cuts in the face of rising housing debt. Therefore, it will be a while before the BOK takes further easing steps," forecasting a potential rate cut in March 2025.