Bank of Korea cuts key rate to 2.5 pct

By Kim Soo-yeon
SEOUL, Jan. 9 (Yonhap) -- South Korea's central bank slashed its key interest
rate on Friday by half a percentage point, the fifth cut in three months, in a
move to bolster the fast slowing economy.

In a monthly policy meeting, the Bank of Korea (BOK) lowered the benchmark
seven-day repo rate to a record low of 2.5 percent. The decision is in line with
an average forecast in a poll of 16 economists by Yonhap Infomax, the financial
news arm of Yonhap News Agency.
In December, the BOK cut the policy rate by a record full percentage point to an
all-time low of 3 percent. Since early October, it had trimmed the rate by a
combined 2.25 percentage points.
"Economic fundamentals are not in good shape. Faltering exports and sluggish
domestic demand warranted a half-a-percentage-point cut," said Kim Jae-eun, an
economist at Hana Daetoo Securities Co. "The BOK is expected to continue its
monetary easing to 2 percent until the first half."
The rate reduction comes amid major cuts by central banks around the globe. The
U.S. Federal Reserve lowered the federal funds rate in mid-December to a range of
zero to 0.25 percent from one percent, marking the lowest level in history.
Recent economic data has showed the South Korean economy is slowing more sharply
than expected, casting a gloomy outlook for Asia's fourth-largest economy.
Exports, the mainstay of South Korea's economic growth, tumbled 17.4 percent in
December from a year earlier after falling 19 percent the previous month as
demand slumped amid a global recession. The government expects the country's
overseas shipments to grow a mere one percent this year, the slowest pace in
eight years.
Industrial output plunged 14.1 percent in November from a year earlier, marking
the sharpest fall on record.
The South Korean economy grew 0.5 percent in the third quarter from three months
earlier, the weakest growth in four years. The BOK predicted that the economy
will expand just 2 percent this year, down from an estimated 3.7 percent advance
in 2008. Most analysts predict economic growth will fall to the 1-percent range.
The government is targeting 3 percent growth in 2009 on the back of an economic
stimulus package, but President Lee Myung-bak said recently the Korean economy
may shrink in the first half amid the global economic downturn.
Meanwhile, the country's consumer prices grew 4.1 percent in December from a year
ago, the slowest pace in eight months due to falling oil prices. This has given
room for the central bank to continue to take easing steps, analysts say.
Experts say the BOK is widely expected to further lower the rate until the first
half of this year, leaving the door open to further liquidity-boosting measures.
BOK Gov. Lee Seong-tae said in his New Year's message that the central bank will
focus its 2009 monetary policy on bolstering the slowing economy and stabilizing
financial markets as inflationary pressure is expected to ease.
"In a move to calm financial markets and kickstart the sputtering economy, the
BOK is forecast to cut the rate aggressively until the first half," said Park
Hyung-joong, an economist at Woori Investment & Securities Co.
sooyeon@yna.co.kr
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