(3rd LD) Bank of Korea cuts key rate to record low 2.5 pct

(ATTN: RECASTS lead; UPDATES with market reactions and details in paras 7,13; ADDS remarks by economists in paras 6,19,20)
By Kim Soo-yeon
SEOUL, Jan. 9 (Yonhap) -- South Korea's central bank on Friday slashed its key
interest rate to a record low and hinted at further action in efforts to keep the
economy from sliding into a recession due to tumbling exports and domestic
demand.
As widely expected, policymakers at the Bank of Korea (BOK) lowered the benchmark
seven-day repo rate by half a point to 2.5 percent, the fifth reduction in three
months. The central bank has trimmed the rate by a combined 2.75 percentage
points since October.
The central bank said it will focus its future monetary policy on improving
liquidity conditions and heading off a severe economic slowdown. It also reduced
the interest on its low-rate loans to commercial lenders by a quarter percentage
point to 1.5 percent.
"The Korean economy is estimated to have contracted sharply in the fourth quarter
from three months earlier," BOK Gov. Lee Seong-tae told a press conference. "The
local economy is fast slowing as domestic and overseas demand are contracting
more sharply than expected."
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 1 percent, marking the lowest level in history.
"The half point rate cut obviously came to bolster the sharply slowing economy,
dented by faltering exports and sluggish domestic demand," said Lee Sung-kwon, an
economist at Goodmorning Shinhan Securities Co. "As the central bank left room
for more cuts, the BOK is expected to continue its monetary easing to 2 percent
until the first half."
Despite the rate cut, the country's key stock index finished 2.05 percent lower
at 1,180.96. The local currency closed at 1,343 won to the dollar, down 10 won
from the previous session.
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.
Earlier in the day, he warned that it may be difficult for South Korea to achieve
its 3-percent growth target while noting the country still has room for further
rate reduction.
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 created
room for the central bank to continue to take easing steps, analysts say.
"Until the first half of this year, consumer prices will not fall sharply, but
consumer inflation is expected to markedly ease to the lower end of the target
range in the second half," the governor said. The BOK aims at keeping annual
inflation between 2.5 and 3.5 percent until 2009.
Experts say the BOK is widely expected to further lower the rate, possibly to 2
percent until the first half of this year, leaving the door open to further
liquidity-boosting measures.
Gov. Lee 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.
Some even predicted deeper rate cuts down the road.
"Ongoing concerns over a credit crunch and fears over the severe downturn may
prompt the BOK to reduce borrowing costs to 1.5 percent until June," said Lee
Sang-jae, an economist at Hyundai Securities Co.
sooyeon@yna.co.kr
(END)