Bank Of Korea Cuts Rate By Record To Bolster Markets

The Age

Tuesday October 28, 2008

WILLIAM SIM and SEYOON KIM, SEOUL

THE Bank of Korea slashed interest rates by a record at an emergency board meeting in an attempt to bolster markets as the nation faces its biggest crisis since an International Monetary Fund bail-out 10 years ago.

Governor Lee Seong Tae cut the seven-day repurchase rate 75 basis points to 4.25%, the central bank said in a statement in Seoul.

The bank also broadened the type of bonds it will accept as collateral in money-market operations, giving lenders access to more funds.

The Kospi stock index slumped on concern the rate cut will not prevent the economy from slowing and could put more pressure on the weakening won.

President Lee Myung Bak, who met Finance Minister Kang Man Soo and the central bank's Lee Seong Tae on Sunday, said yesterday the country was far from experiencing a repeat of the 1997 financial crisis when it needed a $US57 billion loan from the IMF.

"The Korean authorities felt compelled to take dramatic action in the face of global turmoil," said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. "The rate cut might provide a brief boost to the financial market, but the general panic environment prevails."

The central bank also cut rates on special loans for small- and medium-sized companies to 2.5% from 3.25%.

The Kospi index closed 7.7points, or 0.82%, higher, at 946.45, after earlier rising as much as 3%. The index plummeted 20% last week in its worst week since 1997.

The won sank to 1440 against the US dollar from 1424, extending this year's drop to 36%.

"What we urgently need is stabilisation of the currency and a drop in risk premiums paid to investors when local companies raise funds overseas," said Song Seong Yeob, a fund manager at KB Asset Management in Seoul.

"The interest rate cut doesn't directly cover such issues. Rather, it will trigger a further decline of the won against the US dollar."

The Bank of Korea said the "large cut was called for in order to guard securely against the possibility of a sharp contraction of real economic activity".

Governor Lee hinted at further rate cuts, saying the bank would "maintain a stance to pay more attention" to the risk of slower economic growth. He said inflation was likely to ease on weak domestic demand and falling oil prices.

"The Bank of Korea will probably cut rates again at its monthly rate-setting meeting next week," said Chun Chong Woo, an economist at SC First Bank Korea. "The bank seems determined to stop the market panic from the US financial crisis spreading."

The bank said yesterday it would also ease rules to make it easier for exporters to borrow dollars. Also, small businesses that borrowed mostly in Japanese yen could extend their foreign currency loans for another year, it said. The won has fallen 47% against the yen this year.

The bank last week raised the limit on so-called total loans to 9 trillion won ($A10billion) from 6.5 trillion won.

Total loans are offered to commercial banks at a rate lower than the benchmark rate, with the funds earmarked for small and medium-sized businesses.

The central bank said on October 24 it would inject 2trillion won into the financial system through repurchase- agreement operations.

© 2008 The Age

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