Bank of Korea cuts key rate to 2 pct

By Kim Soo-yeon
SEOUL, Feb. 12 (Yonhap) -- South Korea's central bank slashed its key interest
rate on Thursday by half a percentage point to a new record low in an attempt to
keep the economy from slipping into a recession.
In a monthly policy meeting, the Bank of Korea (BOK) lowered the benchmark
seven-day repo rate to 2 percent, the sixth cut in four months. Since October,
the BOK has trimmed the rate by 3.25 percentage points.
The decision is not in line with a quarter percentage point cut forecast by 11
out of 20 economists polled by Yonhap Infomax, the financial news arm of Yonhap
News Agency. Eight experts predicted a 0.5 percentage point reduction.
"Plunging exports and sluggish domestic demand warranted half a percentage rate
cut," 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 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.
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
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.
BOK Gov. Lee Seong-tae 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
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