Time for Bank of Korea to cut rates, Moody's says

SEOUL, Sept. 30 (Yonhap) -- South Korea's central bank needs to swiftly cut its key interest rates to stimulate the domestic economy and shield itself from fallout emanating from the U.S. financial crisis, a research unit of Moody's Investors Service said Tuesday.

South Korea, which survived a potential massive capital outflow due to an
unusually high amount of bonds maturing this month, has not been immune to the
global credit market mess, said Daniel Melser, a Sydney-based economist at
Moody's Economy.com.
"A shortage of liquidity has emerged as a real problem of late," Melser said.
"For this reason and others, it is time for the Bank of Korea to seriously ponder
cutting rates before the year is out."
The South Korean central bank will hold a monetary-policy meeting on Oct. 9.
As oil prices have subsided, a slowdown in price growth is freeing the hands of
the Bank of Korea's inflation hawks, who had been loath to lower rates as long as
price growth was accelerating, the economist said.
"It will take a stronger domestic economy to counteract the weaker overseas
demand for Korea's exports stemming from the financial crisis," said Melser. "The
answer is a rate cut, and soon."
Asia's fourth-largest economy is facing a serious challenge from a slowdown in
exports, which constitute the nation's main locomotive for growth, as the
U.S.-sparked financial turmoil has created a global economic slowdown.
The local stock market has been hit by developments in the U.S. in recent weeks
in the wake of the collapse of Lehman Brothers Holdings Inc., the Bank of
America's purchase of Merrill Lynch & Co. and the U.S. government's rescue of
American International Group Inc.
On Tuesday, South Korea's benchmark stock index fell 0.6 percent to close at
1,448.06, after plunging as much as 5.5 percent on news that U.S. lawmakers
rejected a US$700 billion bailout package to rescue the failing financial sector.
The U.S. is South Korea's second-largest export destination after China.
Earlier in the day, South Korea's National Statistical Office said the nation's
August industrial output fell 2.2 percent from a month earlier, missing analysts'
estimates.
The Bank of Korea kept its base rate unchanged at 5.25 percent last month after
raising it by a quarter of a percentage point in August for the first time in a
year.
A survey by the Federation of Korean Industries, the nation's largest business
lobby, found on Monday that more than 70 percent of local companies believe that
turmoil in the U.S. financial markets will cause a global recession.
The survey showed 70.6 percent of local companies believed the U.S. financial
crisis would force the world's real economies into "a recession" or "spread into
a global credit crisis."
"The rejection of the U.S. bailout plan is seen as a sign that a recovery in the
U.S. economy could be delayed," said Noh Seong-ho, a senior researcher at the
state-run Korea International Trade Association.
"As a result, the outlook for our exports are darkening, with the global economic
recession accelerating," Noh said.
South Korea's major exporters, such as Samsung Electronics Co. and Hyundai Motor
Co., were closely watching developments in the U.S. and other major economies as
economic weakness spread throughout the global market.
"The crisis is posing a serious impact on consumer markets as well as the
financial sector," said an official at Hyundai Motor, who declined to be
identified.
The Hyundai Motor official said his company would map out countermeasures by
thoroughly figuring out the impact from the financial calamity in the U.S., which
some economists say is the deepest financial crisis since the Great Depression.
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