Bank of Korea cuts key rate to record low

(ATTN: UPDATES with market close in para 6; ADDS comments by economist and other
details in paras 7,15,16)
By Kim Soo-yeon
SEOUL, Feb. 12 (Yonhap) -- South Korea's central bank on Thursday slashed its key
interest rate to a new record low in an attempt to keep the economy from slipping
into a recession and hinted at further rate cuts.

In a monthly policy meeting, the Bank of Korea (BOK) lowered the benchmark
seven-day repo rate by half a percentage point to 2 percent, the sixth cut in
four months. Since October, the BOK has trimmed the rate by 3.25 percentage
points.
The central bank said it will focus its future monetary policy on improving
liquidity conditions and heading off a severe economic slump. It also reduced the
interest on its low-rate loans to commercial lenders by a quarter percentage
point to 1.25 percent.
"The economy is contracting at a faster-than-expected pace and is highly likely
to post negative growth this year," BOK Gov. Lee Seong-tae told a press
conference after the meeting. "Additional rate cuts are possible, but the central
bank will adjust their pace after monitoring the financial market closely."
Lee added that the central bank would consider policy options like quantitative
easing and rate cuts when necessary.
Despite the rate reduction, South Korea's key stock index closed 0.87 percent
lower at 1,179.84.
"The BOK is expected to lower the rate further as the economy is rapidly
deteriorating, but any room for a future reduction seems to be limited down the
road," said Lee Sung-kwon, an economist at Goodmorning Shinhan Securities Co. "I
think the BOK may freeze the rate in March, but it is likely to trim the rate to
1.5 percent by the first half."
The rate cut comes two days after Finance Minister Yoon Jeung-hyun said Asia's
fourth-largest economy will likely shrink 2 percent this year, the first annual
contraction since the 1997-98 Asian financial crisis. The government's earlier
2009 growth target was 3 percent.
The International Monetary Fund predicted that the Korean economy will shrink 4
percent this year and major global investment banks forecast an average 2.3
percent contraction for South Korea.
A set of economic data is showing the Korean economy rapidly heading into a
recession.
The Korean economy shrank 5.6 percent last quarter from three months earlier, the
sharpest fall in almost 11 years, due to tumbling overseas shipments and weak
domestic demand.
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.
South Korea shed 103,000 jobs on-year in January from a year earlier, the
steepest loss in five years, dealing a blow to domestic consumption.
The government is scrambling to unveil a set of stimulus packages, including tax
cuts and expanded spending. Yoon promised to push for a supplementary budget to
generate jobs and keep the economy from sliding deeper into a recession.
"We share the view about the need for the government's active role in boosting
the economy," Gov. Lee said when asked about whether it is considering buying
government bonds. "If necessary, the central bank will do its part in helping the
government's efforts."
The supply of treasury bonds is expected to increase as the government plans to
sell more debt to finance its fiscal spending.
Meanwhile, the country's slowing inflationary growth gave more room for the BOK
to take easing steps. South Korea's consumer prices grew 3.7 percent on-year in
January, marking an 11-month low.
Experts say the BOK is likely to continue its monetary easing down the road, but
the central bank is also expected to carefully weigh the depth of any future rate
cut, as a large reduction could leave it with few cards to play in coping with
further economic deterioration.
Despite a series of rate reductions by the BOK, money is still 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.
The BOK chief said on Jan. 30 that the central bank will adjust the timing and
scale of rate changes according to economic and financial market situations,
adding that it would be more proactive in pouring liquidity into the financial
system.
sooyeon@yna.co.kr
(END)