Bank of Korea Lowers Rates for Third Time in a Month

By William Sim

Nov. 7 (Bloomberg) -- The Bank of Korea cut interest rates by 25 basis points today, the third reduction in a month, to prevent the economy's first recession since the nation needed an International Monetary Fund bailout a decade ago.

Governor Lee Seong Tae and his board lowered the seven-day repurchase rate to 4 percent in Seoul, as forecast by 10 of 16 economists surveyed by Bloomberg. That added to a 75 basis points reduction last week and a 25 basis point move Oct. 9.

Lee has undertaken the most aggressive round of cuts since the bank started setting a policy rate in 1998, striving to limit economic damage from the global credit crisis that has sent Korea's won down 32 percent this year and the stock index plunging 45 percent. India, Japan and Australia lowered rates in the past week as the financial turmoil that has pummeled the U.S. and Europe threatens to engulf Asia's export-dependent economies.

``Policy makers around the world are making efforts to prevent a recession,'' said Chun Chong Woo, an economist at SC First Bank Korea Ltd. in Seoul. South Korea may avoid a recession thanks to the government's stimulus efforts unless the global economic and financial crisis deepens, he said.

The Bank of England slashed its benchmark rate by 1.5 percentage points yesterday and the European Central Bank lowered its rate by a half-point. The IMF yesterday predicted economic contractions in the U.S., Japan and euro region next year, calling for further interest-rate cuts and fiscal stimulus.

Currency, Shares

South Korea's won fell 2.3 percent to 1,362.25 versus the dollar at 10:21 a.m. in Seoul. The Kospi stock index tumbled 4.2 percent to 1,046.59, in line with drops in global equities.

``Our economy is expected to slow rapidly as the impact of the financial-market instability spreads to the real economy,'' the central bank said in a statement today. Inflation is likely to moderate, it added.

The bank also cut the rate on special loans for small-and medium-sized companies to 2.25 percent from 2.5 percent.

South Korea has pumped funds into the banking system, guaranteed lenders' debts and secured an Oct. 30 agreement from the Federal Reserve to provide $30 billion in U.S. currency. The measures are aimed at easing the freeze in credit markets and a shortage of U.S. dollars that has stoked concern the nation's banks wouldn't be able to refinance their offshore borrowings.

The won advanced after the Fed swap deal was announced and default protection costs on Korean government debt fell by the most in more than four years.

Time to Act

``Concerns about foreign-currency liquidity seem to have mostly diminished and now is the time to take more close care of the real economy,'' President Lee Myung Bak said this week.

South Korea's slowdown is deepening. Economic growth cooled to the weakest in four years last quarter as exports declined the most in almost seven years and consumer spending stagnated.

Finance Minister Kang Man Soo unveiled a 14 trillion won ($10.5 billion) package of extra spending and corporate tax breaks this week, adding to almost $20 billion in income-tax reductions announced in September.

Exports, the main engine of the economy's 10-year expansion, rose at the weakest pace in 13 months in October as shipments to China, South Korea's biggest overseas market, fell for the first time since 2002.

In September, jobs growth slowed to the weakest pace since 2005 as manufacturers, builders and retailers cut workers and retail sales gained by the least in nine months.

Hyundai Motor Co., South Korea's second-biggest exporter, on Oct. 23 slashed its global vehicle-sales forecast for the year. Posco, the region's biggest maker of stainless steel, said last month it will cut output by about a third this quarter to cope with slowing demand.

Consumer prices rose 4.8 percent in October, the smallest gain in six months, providing room for further rate reductions. Inflation peaked at 5.9 percent in July.

Economists from Capital Economics Ltd. and SC First Bank Ltd. forecast South Korea's benchmark rate will be cut to 2 percent by mid-2009 as the economy falters.

To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net