BOK makes emergency rate cut to 4.25 pct

(ATTN: UPDATES with market close in para 6; ADDS remarks by economist at paras 7,9-10; TRIMS throughout)
By Kim Soo-yeon
SEOUL, Oct. 27 (Yonhap) -- South Korea's central bank slashed its key interest rate on Monday by 0.75 percentage point, its largest cut ever, in a bid to keep global financial turmoil from sharply slowing the real economy.

In a blitzkrieg move, Bank of Korea (BOK) Gov. Lee Seong-tae and his six fellow
policymakers lowered the benchmark 7-day repurchase agreement (repo) rate to 4.25
percent at an unscheduled policy meeting.
The rate cut came less than three weeks after the BOK trimmed the rate on Oct. 9
in a concerted effort to soothe global financial turmoil, the first reduction
since November 2004.
"The move will help stem the sharp slowdown of the local economy and stabilize
market jitters," Lee told a press conference.
"Domestic demand is faltering amid financial turmoil and exports will likely slow
down. Under these circumstances, the central bank will be paying attention to
those risks for the time being," Lee said, hinting at an additional rate cut down
the road.
South Korea's key stock index, which declined about 20 percent alone last week,
edged up 0.82 percent to close at 946.45 after falling almost 5 percent at one
point. But the Korean currency hit an over 10-year low to close at 1,442.5 won to
the dollar.
Economists say that the emergency rate cut reflected the central bank's all-out
efforts to help ease financial strains facing local banks and companies and some
expect an additional rate cut as early as November.
"The larger-than-expected rate cut came as a surprise. The BOK seemed to be
making an effort to swiftly stabilize the markets with an aggressive rate cut,"
said Kim Jae-eun, an economist at Hana Daetoo Securities Co.
Lee Sung-kwon, a senior economist at Goodmorning Shinhan Securities, said the
rate cut was timely and a possibility for an additional rate reduction is left
open, given uncertainty in the global markets.
"But considering the stock and currency market reactions to the rate cut, there
is a long way to go. The government and the BOK should show more concerted
efforts to restore confidence," economist Lee said.
According to the BOK, the South Korean economy grew 0.6 percent on-quarter in the
third quarter, marking the slowest growth in four years, due to sluggish domestic
demand and lagging export growth.
South Korean households and smaller firms, whose debts are piling up, have been
increasingly cutting their spending amid a slowing economy and the global
financial meltdown.
Asia's fourth-largest economy is expected to lose steam further next year as
exports, which account for about 50 percent of the economy, are likely to slow
down.
Gov. Lee told lawmakers last week that it would be difficult for the local
economy to make 4 percent growth next year although it may see growth in the
3-percent range. He expected that exports would not see double-digit growth in
2009. The Korean economy expanded 5 percent in 2007.
Experts say recent retreats in oil prices seemed to help ease the BOK's burdens
in controlling inflation. Crude oil prices have been heading downward since
peaking at almost $150 per barrel in July. South Korea, the world's fifth-largest
crude buyer, relies entirely on imports for its oil needs.
South Korea's consumer prices climbed 5.1 percent on-year in September, as oil
and commodity prices showed signs of stabilization. They breached the BOK's
target range of 2.5-3.5 percent for the 10th straight month.
"As other central banks have been cutting rates as well, the BOK's rate reduction
today will not put additional downward pressure on the local currency," the
governor said, adding that faltering domestic demand would also ease upside risks
to inflation.
Along with the rate reduction, the BOK unveiled a set of measures to help provide
more liquidity to the financial system.
The BOK lowered the interest on its low-rate loans to commercial lenders by 0.75
percentage point to 2.5 percent. The central bank last week raised the cap on
such loans for the first time in seven years in a bid to help smaller firms
weather the current cash crunch.
The central bank also said it plans to purchase bonds sold by commercial lenders
through repurchase agreement operations in a bid to help them to secure Korean
won liquidity.
The BOK said it will include bank bonds and some special debts in its repo deals.
Currently, the BOK's repo deals include Treasuries and currency stabilization
bonds.
"The central bank is considering buying about 5 to 10 trillion won (US$3.5
billion) worth of bank notes," Lee said. About 25.5 trillion won worth of bank
debts will mature in the fourth quarter.
The move came as local lenders have faced troubles in raising funds or rolling
over debts amid the global financial crisis.
The BOK also softened restrictions on the use of foreign currency loans to
exporting firms in an effort to help ease their losses from the won's weakness.
The central bank said it will allow local banks to extend foreign currency loans
to exporters when they settle currency options. Companies will also get an
additional one-year rollover on foreign currency loans borrowed for use as
working capital.
On Oct. 19, the government unveiled a $130 billion plan aimed at giving
state-guarantees for banks' foreign debts and providing liquidity injection. The
package accounts for roughly 15 percent of the country's economy.
South Korea is also considering cutting additional taxes and increasing its
fiscal spending in a move to bolster the sagging economy.
sooyeon@yna.co.kr
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