(2nd LD) BOK cuts key rate to record low 3 pct

(ATTN: ADDS more details in paras 4,6; UPDATES with market reaction in para 7; TRIMS
throughout)
By Kim Soo-yeon
SEOUL, Dec. 11 (Yonhap) -- South Korea's central bank lowered its key interest
rate by a record one percentage point on Thursday, the fourth rate cut in two
months, in an effort to bolster the slowing economy.
In a monthly policy meeting, the Bank of Korea (BOK) slashed the benchmark
seven-day repo rate to a record low of 3 percent. The previous lowest level was
3.25 percent set in early November 2004.
Before Thursday's move, the BOK had cut the rate by a combined 1.25 percentage
points to 4 percent since early October in a bid to keep global financial turmoil
from impacting the real economy.
The BOK also reduced the interest on its low-rate loans to commercial lenders by
half a percentage point to 1.75 percent. It decided to expand its repurchase
agreement deals with new 12 local securities firms to swiftly provide liquidity
to the financial system.
"The South Korean economy is slowing at a faster-than-expected pace as exports
falter amid weak domestic demand," the BOK said in a statement. "The growth of
the local economy is expected to sharply fall as domestic and overseas demand
will likely deteriorate."
The BOK said it will make efforts in managing its monetary policy to provide
liquidity and to stem a severe economic slowdown.
On the back of the steep rate cut, December treasury bond futures jumped 101
ticks to 110.67 as of 11:00 a.m. The local currency was trading at 1,362.05 won
to the U.S. dollar, up 31.75 won from Wednesday's close.
The move follows the government's unveiling of a string of measures aimed at
jumpstarting the sagging economy, which include additional fiscal spending and
tax cuts.
"A full percentage point rate cut came as a surprise. The central bank seemed to
act preemptively as economic growth for next year is widely expected to sharply
slow," said Kim Jae-eun, an economist at Hana Daetoo Securities Co. "The BOK is
expected to continue its monetary easing until the first quarter of next year."
The South Korean economy grew 0.5 percent in the third quarter from three months
earlier, the weakest growth in four years, as exports fell and domestic demand
stagnated.
Asia's fourth-largest economy is expected to further lose steam next year as
exports, which account for about 60 percent of the economy, have already shown
signs of slowing. The Korean economy grew 5 percent last year.
South Korean overseas shipments declined 18.3 percent on-year in November, the
biggest drop in seven years, as the global economic downturn dealt a blow to
emerging markets like China, the main destination for Korean goods.
International bodies and global investment banks have laid out a gloomy outlook
for the Korean economy next year. The International Monetary Fund cut its growth
prediction for the Korean economy to 2 percent in 2009 from 3.5 percent. UBS AG
forecast that Korea's economy will contract 3 percent next year. But the outlooks
are far below the government's 4-percent.
Meanwhile, the country's consumer prices grew 4.5 percent on-year in November,
the slowest growth in seven months, as oil and raw material prices declined.
Experts said the BOK is expected to reduce borrowing costs until the first half
of next year to cushion the impact of the global recession on the export-driven
local economy.
"Downside risk to economic growth is increasing, which also calls for aggressive
economic stimulus packages from the government," said Im No-jung, an economist at
Solomon Investment & Securities Co. "The BOK is expected to cut the rate down the
road in a concerted effort to boost the economy."
sooyeon@yna.co.kr
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