(2nd LD) S. Korea`s central bank cuts key rate to 4 pct

(ATTN: RECASTS lead, paras 2, 7; UPDATES with remarks by BOK Gov. in paras 5-6; TRIMS throughout)
By Kim Soo-yeon
SEOUL, Nov. 7 (Yonhap) -- South Korea's central bank slashed its key interest rate Friday for the third time in a month to bolster the slowing economy and hinted at an additional rate cut, citing growing downside risks to growth.

In a monthly policy meeting, the Bank of Korea (BOK) lowered the benchmark
seven-day repo rate by a quarter percentage point to 4 percent, the lowest level
since February 2006, saying the economy is likely to cool sharply down the road.
The rate cut, which is in line with market forecasts, comes less than two weeks
after the BOK trimmed the rate by a record 0.75 percentage point to 4.25 percent
to keep global financial turmoil from impacting the real economy. It was the
second rate reduction in October.
The BOK also reduced the interest on its low-rate loans to commercial lenders by
0.25 percentage point to 2.25 percent.
"The growth of the Korean economy is expected to slow sharply as the pace of
export growth is markedly falling and domestic demand remains sluggish," BOK Gov.
Lee Seong-tae told a press conference. "Meanwhile, the growth of inflation is
likely to slow to the 3 percent range by the middle or second half of next year."
Lee said the BOK plans to manage its monetary policy by preventing financial
market jitters from severely contracting the economy while keeping a close watch
on inflation, hinting at a possible rate reduction.
The BOK chief said last month 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. The Korean economy expanded by 5 percent in 2007.
After the central bank made the remarks, the country's key stock index edged up
0.08 percent to 1,093.04 as of 12:05 p.m. Paring earlier losses, the local
currency was trading at 1,333.45 won to the dollar, down 2.65 won from Thursday's
close.
"The global financial meltdown is hurting real economic activity. Domestic demand
remains lackluster and exports are showing signs of slowdown," said Lee
Sung-kwon, an economist at Goodmorning Shinhan Securities Co. "The cumulative
rate cuts along with the government's economic stimulus packages will have a
concerted effect on the economy."
The South Korean economy grew 0.6 percent on-quarter in the third quarter -- the
slowest growth in four years -- due to faltering domestic demand and lagging
export growth. Exports account for about 50 percent of economic growth.
Households and smaller firms who are struggling with mounting debt have been
increasingly cutting their spending, adding to the economy's woes.
The government said Monday that it will increase government spending by 14
trillion won (US$10.5 billion) next year in a bid to prop up the slumping economy
and help low-income households weather the current financial turmoil.
Meanwhile, the country's consumer price growth slowed to 4.8 percent on-year in
October as oil and commodity prices declined. The country's consumer inflation,
however, breached the BOK's target range of 2.5-3.5 percent for the 11th straight
month.
Experts say South Korea's recent currency swap deal with the United States might
have provided some leeway for the BOK to trim the borrowing costs, as the
agreement eased downward pressure on the local currency. The won has dipped about
29 percent against the greenback so far this year.
On Oct. 30, the BOK announced a $30 billion swap agreement with the U.S. Federal
Reserve. The won posted its largest daily gain against the dollar in 11 years on
the same day.
Economists say the BOK will likely trim the rate further until the first half of
next year in an effort to boost economic growth.
"The central bank may reduce the rate to 3.25 percent until the first half of
2009, given cooling economic growth," said Lee at Goodmorning Shinhan.
sooyeon@yna.co.kr
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