(News Focus) BOK forecast to make additional rate cuts

SEOUL, Oct. 9 (Yonhap) -- South Korea's central bank is widely expected to make additional interest rate cuts down the road as part of efforts to minimize the impact of global financial turmoil on the local economy, analysts say.

In a blitzkrieg move, the Bank of Korea (BOK) lowered the benchmark 7-day repo
rate to 5 percent from 5.25 percent on Thursday, the first rate reduction since
November 2004. It came on the heels of rate cuts by U.S. and European central
banks.
Market watchers predict the BOK will have no choice but to slash the benchmark
interest rate more in the coming months in order to keep the repercussions of the
current global credit crunch from spilling over to the real economy.
Indeed, the BOK's chief left open the possibility of additional rate cuts.
"It is possible there will be interest rate changes later on," BOK Gov. Lee
Seong-tae said after a monthly rate-setting meeting. "If the foreign exchange
market stabilizes and the downward path of oil prices continues, the growth of
inflation is expected to ease toward next year."
Market analysts construed Lee's remarks as hinting that the central bank is
poised to lower the key rate further in order to head off a sharp slowdown of the
economy.
"Although inflation risks remain amid a weaker won, the BOK joined in a round of
rate cuts worldwide. The BOK seemed to give its weight to the economy," said Lee
Sung-kwon, a senior economist at Goodmorning Shinhan Securities Co.
The rate cut comes as the U.S. financial crisis has wreaked havoc on the South
Korean currency market, sending the won making a free fall against the greenback.

The South Korean currency has fallen about 32 percent versus the dollar so far
this year, though it recovered slightly Thursday on strong government
intervention.
South Korea has also been troubled by an economic slowdown. The economy, Asia's
fourth-largest, is losing ground, led by faltering domestic demand. The
International Monetary Fund downgraded its growth forecast for the Korean economy
next year to 3.5 percent.
Households and smaller firms whose debt piled up have felt an increased pinch as
higher inflation, coupled with a fall in real income, is sapping their spending.
The country's consumer prices slowed to 5.1 percent on-year in September on
falling oil prices, but breached the BOK's target range of 2.5-3.5 percent for
the 10th straight month.
Although further rates cuts are in the cards, analysts say, the timing of
possible monetary easing would depend on stabilization of the local foreign
exchange market.
"Given uncertainty over the ongoing global financial crisis, there is a chance
that the BOK may cut the rate once this year," said Kim Jae-eun, an economist at
Hana Daetoo Securities Co., adding that inflation may have peaked and the local
economy is likely to cool down.
The instability of South Korea's currency market is expected to firm up once its
current account deficit switches back to the black in coming months.
The country posted a current account deficit of US$12.6 billion in the first
eight months of this year, putting downward pressure on the local currency.
Gov. Lee said the country is expected to post a current account surplus in the
fourth quarter, which would help ease fragile sentiment in the foreign exchange
market.
The central bank said South Korea is forecast to log an annual current account
deficit of about $10 billion, which would mark the first deficit since 1997.