Experts divided over depth of rate cut for Feb.

SEOUL, Feb. 9 (Yonhap) -- South Korea's central bank is widely expected to
further slash its key interest rate for February to bolster the slowing economy,
but experts were divided Monday over how much the bank will cut the rate.
Asia's fourth-largest economy shrank 5.6 percent last quarter from three months
earlier, the sharpest fall since the Asian financial crisis a decade ago, due to
tumbling exports and weak domestic demand.
Since October, the Bank of Korea (BOK) has cut the benchmark seven-day repo rate
by a combined 2.75 percentage points to a record low of 2.5 percent, joining a
round of rate cuts by global central banks in a desperate effort to stave off the
deepening economic downturn.
The central bank is scheduled to hold its monthly rate-setting meeting on Thursday.
"Without a doubt, the BOK will continue its monetary easing, but the bank is
forecast to trim the rate by only a quarter percentage point this week to save
room for the possible deteriorating economic slump," said Gong Dong-rak, a
fixed-income analyst at Hana Daetoo Securities Co.
The view is widely confirmed by a recent poll conducted by Yonhap Infomax, the
financial news arm of Yonhap News Agency. A total of 11 economists out of 20
financial institutions predicted that the BOK will lower the rate by 0.25
percentage point, the poll showed. Eight experts forecast half a percentage point
cut, while one expected a freeze.
Despite a series of aggressive rate reductions by the BOK, money is not flowing
smoothly into the real economy as lenders, wary of rising bad debt, have been
increasingly reluctant to extend loans to smaller firms and households.
Money has been returning to the BOK through repurchase agreement operations or
put in short-term investment vehicles like money market funds due to risk
aversion by local banks.
"As the European Central Bank stood pat on the rate this month, the Korean
central bank may adjust its pace of monetary easing. This would give a signal to
the market that the BOK will continue to cut the rate while leaving the cards to
be used for future actions," Gong said, adding that the BOK is likely to cut the
policy rate to 1.75 percent until the first half.
But analysts arguing for a half-point cut said that given deteriorating economic
data, the BOK is forecast to lower the borrowing costs more aggressively.
"I think tumbling exports and sluggish domestic demand warrant a 0.5 percentage
point rate cut this month," said Jun Min-kyu, an economist at Korea Investment &
Securities Co., who expects the BOK to trim the rate to 1.5 percent by the end of
June.
A raft of economic data is reinforcing worries that the Korean economy is rapidly
heading into a recession.
Exports, which account for about 60 percent of the local economy, plunged a
record 32.8 percent on-year in January. The country's industrial output tumbled
an unprecedented 18.6 percent in December from a year earlier.
BOK Gov. Lee Seong-tae warned on Jan. 30 that the Korean economy will likely
shrink in 2009 unless economic conditions improve significantly in the first
half. It was the first time that the BOK chief warned of a possible economic
contraction for 2009.
The BOK predicted in December that South Korea's economy will grow 2 percent this
year, while the government is targeting 3 percent growth.
But South Korea's finance minister-designate Yoon Jeung-hyun said at his
confirmation hearing on Friday that the government will soon announce a revised
target for this year's economic growth, as its earlier estimate seems to be out
of reach.
The International Monetary Fund predicted last week that the Korean economy will
shrink 4 percent this year, which would mark the first annual contraction since
the 1997-98 Asian financial meltdown.
sooyeon@yna.co.kr
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