S. Korea, Hong Kong, Taiwan Cut Rates, Joining Action

By William Sim and Victoria Batchelor

Oct. 9 (Bloomberg) -- South Korea, Taiwan and Hong Kong cut interest rates a day after reductions by the U.S., Europe and China to stem damage from the global financial crisis.

The Bank of Korea and Taiwan's central bank lowered their rates by a quarter of a percentage point and Hong Kong cut its benchmark to 2 percent. The Bank of Japan, which kept its policy rate at 0.5 percent this week, pumped 2 trillion yen ($20 billion) into the financial system.

Stocks in Japan, South Korea and Hong Kong all rose after the rate cuts, snapping market declines that have helped wipe more than $5 trillion off stocks globally this month. The International Monetary Fund yesterday forecast the world's advanced economies will expand at the weakest pace since 1982 next year, sapping growth in emerging nations.

``Investors are a bit relieved with the Asian central banks' actions, which will support flagging economies,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. ``The relief also comes from confirming that those banks are flexible enough for more rate cuts.''

The Federal Reserve, European Central Bank and four other central banks lowered rates by a half point yesterday in an unprecedented, emergency coordinated bid to reduce fallout from the worst financial meltdown since the Great Depression.

Within minutes of yesterday's joint action, the People's Bank of China pared its one-year lending and deposit rates by 0.27 percentage point.

Asian Moves

The Bank of Korea today lowered the seven-day repurchase rate to 5 percent, the first cut in four years. Taiwan's central bank reduced the discount rate on 10-day loans to banks to 3.25 percent. Hong Kong trimmed its base rate to track the Fed's move.

``As the financial crisis in the U.S. and Europe continues to spread, the risk of a global economic slump increases sharply,'' Taiwan central bank Governor Perng Fai-nan told reporters in Taipei after announcing his intra-meeting cut.

The MSCI Asia Pacific Index advanced 0.7 percent to 92.04 as of 4:09 p.m. in Tokyo, ending a five-day, 16 percent slump. South Korea's Kospi index climbed 0.6 percent, Japan's Topix index gained 0.7 percent and Hong Kong's Hang Seng index rose 2.7 percent.

``Policy makers around the world are now extremely keen to boost economic and market activity,'' said Sherman Chan, an economist at Moody's Economy.com in Sydney. ``The effects of the global rate cuts are expected to be positive, but will take time to flow through to the economy and financial markets.''

Australia, New Zealand

The Reserve Bank of Australia, which slashed its benchmark rate by 1 percentage point this week, added A$3.49 billion ($2.3 billion) to money markets today. New Zealand's central bank said it will increase the range of securities it accepts from lenders to help boost liquidity.

``We are committed to ensuring the ongoing health of the financial system and remain ready to respond as appropriate,'' Reserve Bank of New Zealand Governor Alan Bollard said.

The rate cuts in South Korea and Hong Kong did little to free up credit as banks continued to hoard cash on concern that borrowers may become unable to repay loans.

Hong Kong's three-month interbank offered rate jumped 25 basis points to 4.4 percent, a one-year high. The South Korean rate for three-month commercial paper, an unsecured debt instrument issued by corporations, climbed 1 basis point to 6.66 percent, the highest since January 2001.

Taiwan's rate on 90-day commercial paper dropped 4 basis points to 2.17 percent, declining to the lowest since Dec. 20.

Standard & Poor's said this week South Korea's banks face increased difficulties in refinancing loans because of the credit squeeze. Banks' foreign-currency funding was $127 billion as of June 30, double the level at the end of 2005, S&P said.

``It's good Asian central banks have shifted their focus away from inflation to growth,'' said Huw McKay, senior international economist at Westpac Banking Corp. in Sydney. ``But we're in for a very rough ride for the more externally leveraged economies in the region.''

To contact the reporters on this story: William Sim in Seoul at wsim2@bloomberg.net; Victoria Batchelor in Wellington at vbatchelor@bloomberg.net.