(News Focus) Unscripted rate cut seen to boost sagging Korean economy

SEOUL, Oct. 27 (Yonhap) -- The unscheduled and widest-margin interest rate cut by South Korea's central bank is expected to help prop up the country's slump-hit economy and restore crumbling market confidence, analysts said Monday.

Joining a round of worldwide rate cuts, the Bank of Korea (BOK) cut its key rate
by 0.75 percentage point to 4.25 percent in a bid to shore up Asia's
fourth-largest economy amid global financial turmoil.
"A big cut was needed to guard securely against the possibility of a sharp
contraction of real
economic activity, large swings of the exchange rate and stock prices and the
partial seizing up of the credit markets," the central bank said in a statement.
Monday's unprecedented rate cut was the biggest by the central bank. After the
Sept. 11 attacks on the United States in 2001, the central bank slashed the rate
by 0.5 percentage point.
Analysts said the rate cut indicated the central bank's all-out effort to shield
Asia's fourth largest economy from the effects of the global credit crunch.
"The rate cut is very preemptive and aggressive," said Kim Young-ik, a senior
researcher at Hana Daetoo Investment & Securities. "That's very positive for the
market."
Jun Jong-woo, an economist at SC First Bank, said the rate cut was larger than
expected. "The central bank seemed to be making an effort to swiftly stabilize
the markets with an aggressive rate cut," he said.
The decision came after local financial markets plunged last week on concern the
economy is buckling under the strain of the global financial turmoil and domestic
banks have been struggling to get liquidity amid the lingering credit crunch.
The economy expanded 3.9 percent in the third quarter from last year, the slowest
pace since 2005, and down from 4.8 percent growth in the second quarter, the
central bank said Friday.
South Korea's stock market lost 20 percent last week, hit by concerns about a
global economic slump, extending this year's loss to around 35 percent. The
country's currency has also lost over 35 percent against the U.S. dollar.
"The rate cut and other market stabilization measures will help recover market
confidence," said Shin Min-young, a researcher at LG Economic Research Institute.
"The moves will also help reduce financial burdens on households and local
companies facing liquidity problems."
"The local stock market seems to be close to its bottom," said Lee Jong-woo, a
senior analyst at HMC Investment & Securities. "The market may attempt to make a
technical rebound with the rate cut."
The central bank also said it will buy 10 trillion won (US$6.95 billion) worth of
bonds issued by local banks through repurchase agreements in a bid to boost
liquidity for lenders.
The move is also expected to drag down market interest rates which have soared in
the past few months, placing an increased financial burden on households and
companies, analysts said.
"The central bank's purchases of bonds sold by banks will help boost demand for
corporate bonds," said Kong Dong-rak, an analyst at Hana Daetoo Investment &
Securities. "Overall liquidity conditions will improve."
The BOK also said it will allow exporters to borrow dollars to pay for the
currency-related losses.
Local lenders have faced difficulty raising funds as the global credit crunch
left them unable to get access to debt markets.
South Korea last week pledged $130 billion to support lenders as the credit
crunch saps local banks' access to foreign funds, and announced that it will
spend as much as 8 trillion won to rescue builders struggling with unsold homes.
The central bank said last week it will inject 2 trillion won into the financial
system through repurchase-agreement operations, and raised the limit on loans
offered to commercial banks to 9 trillion won from 6.5 trillion won.
The loans are extended to lenders at a lower than the nation's benchmark rate
with the funds earmarked for small and medium-sized businesses.
sam@yna.co.kr
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