South Korean central bank slashes key interest rate

December 11 2008
By Kelly Olsen

South Korea’s central bank carried out its biggest interest rate cut ever Thursday, slashing borrowing costs by a full percentage point to a record low in a bid to stave off possible recession.

The Bank of Korea said it was slashing its benchmark seven-day repurchase rate to 3 percent from 4 percent during a regular policy meeting.

Deteriorating economic data have raised alarm bells that Asia’s fourth-largest economy could fall into its first contraction since 1997, when the country was in the throes of the Asian financial crisis. Exports fell 18.3 percent in November from the same month last year.

“It’s quite surprising,” Citibank Korea economist Oh Suk-tae said regarding the size of the rate cut, which suggests that the bank may think “growth could be zero next year” given South Korea’s export decline and neighboring China’s first fall in exports in seven years in November.

South Korea’s economy slowed in the third quarter and economists have been divided over whether it can avoid a recession. Swiss bank UBS (nyse: UBS news people ) issued a bearish forecast last month, predicting that the economy will contract 3 percent in 2009 amid worsening conditions such as increasing non-performing loans, rising corporate failures, falling housing prices and slowing exports.

Citibank’s Oh said he will likely have to lower his forecast for a 2 percent expansion for next year. He said the economy will likely still manage to grow just above 4 percent in 2008. That would be down from 5 percent last year.

“General measures of economic activity are decelerating rapidly,” International Monetary Fund official Subir Lall said in a speech Tuesday in Seoul.

Lall cited slowing consumer spending and exports as well as falling business confidence as evidence for the emerging weakness in South Korea’s economy.

Thursday’s rate cut marked the fourth time the central bank has lowered borrowing costs in the past two months and exceeded the 0.75 percentage point emergency cut on Oct. 27, previously the largest ever.

The rate has gone from 5.25 percent to 3 percent since the cycle of easing began on Oct. 9.

The previous record low for the bank’s benchmark rate was 3.25 percent last seen in October 2005.

South Korea’s benchmark stock index showed little reaction to the decision, rising 0.4 percent to 1,150.33 points in late morning trading.

The South Korean won, which has been battered this year, traded 2.4 percent higher against the dollar at 1,361.

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APTN cameraman Yong-ho Kim and APTN producer Hyun-ah Kim contributed to this report.

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Published in: on December 12, 2008 at 12:08 pm  Comments Off on South Korean central bank slashes key interest rate  
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Korea Rules Out Tapping IMF Loan

November 16 2008

By Lee Hyo-sik

President Lee Myung-bak ruled out the possibility of utilizing IMF money, Sunday, citing Korea’s sufficient foreign exchange reserves and the bitter memory of the bailout following the 1997-98 Asian financial crisis.

After attending the G20 summit in Washington Saturday, Lee said that the government will not need to turn to the Washington-based organization for funds, stressing the nation can ride out the current economic difficulties on its own.

“The government has decided not to use an IMF loan because if we receive money from it, everyone will see that as a sign of trouble. We had no choice but to ask for dollars from the IMF 10 years ago, but the situation is completely different now,” the President noted.

He then said the financial institution should reform itself drastically to regain creditability among its member economies. “In a meeting with IMF Managing Director Dominique Strauss-Kahn, I told him that the way the IMF treated troubled economies 10 years ago tarnished its image because it imposed a range of stringent conditions that did not help the recipients much. I urged him to spare no effort to overhaul the organization to be reborn as a trustworthy international entity,” Lee stressed.

Additionally, Bloomberg quoted Deputy Strategy and Finance Minister Shin Je-yoon as saying that Korea will not tap the IMF for loans because the nation has sufficient foreign exchange reserves and other lines of credit it can draw upon.

It also reported that Shin said the Korean government may introduce more fiscal stimulus measures to boost domestic demand and thus spur growth amid growing concerns of a global recession and its fallout on Korea.

“If circumstances worsen, we are ready anytime to take more action. We want to stimulate domestic demand by using fiscal policy. We still have much room to implement such measures,” the newswire quoted Shin as saying.

His remarks come at a time when the world’s 13th largest economy is facing increasing downside risks in the wake of a global economic downturn as domestic demand continues to deteriorate, failing to offset falling outbound shipments.

Major research institutes at home and abroad project that Asia’s fourth largest economy will expand by below 4 percent next year, with UBS floating the possibility of only 1.1 percent growth. The state-run Korea Development Institute projected that the economy will grow 3.3 percent from a year earlier, while Samsung Economic Research Institute put Korea’s 2009 growth rate at 3.6 percent.

However, the government has pledged to propel growth to the 4 percent range, create 200,000 jobs and post a current account surplus of $5 billion next year through a $26 billion stimulus package, equal to 3.7 percent of GDP. The package includes 11 trillion won in additional spending to initiate public infrastructure projects, and three trillion won in tax cuts.

The Bank of Korea has also slashed the benchmark seven-day repurchase agreement rate by 1 percentage point to 4 percent since late last month in a move to ease a liquidity shortage and minimize the economic downturn.

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