South Korea Likely to Cut Interest Rate Further, Institute Says

By Seyoon Kim

Nov. 20 (Bloomberg) -- South Korea's central bank is likely to cut interest rates further to protect the economy from the global slowdown, according to the head of the Korea Development Institute.

``I believe the Bank of Korea will cut rates; the central bank has already said it can,'' Hyun Jung Taik, president of the state-run researcher, said in an interview from Seoul on Nov. 18. ``The Bank of Korea should increase liquidity further. Even though it has cut rates a lot, rates in economies like the U.S., England, Europe and Japan are much lower.''

Governor Lee Seong Tae trimmed borrowing costs most recently on Nov. 7, the third reduction in four weeks, and has hinted he's ready to act again to prevent the economy from slumping. Lee has undertaken South Korea's most aggressive round of cuts since the bank began setting a policy rate a decade ago, striving to limit economic damage from the global credit crisis.

On top of the rate cuts, the government on Nov. 3 pledged to spend an extra 14 trillion won ($9.7 billion) in 2009. The package will add 1 percentage point to economic growth, which is at risk of falling below 3 percent in 2009 if global conditions deteriorate further, according to the government.

``The government has announced a series of policy steps and they will help reduce the shock from the global economic slowdown,'' Hyun, 59, said. ``It'd be too much to expect that the steps will activate the economy, but they will help shield it from the external shocks.''

Slower Growth

Asia's fourth-largest economy will expand 3.3 percent next year, the institute forecast in its half-yearly report released last week. The institute trimmed its 2008 growth prediction to 4.2 percent from a May estimate of 4.8 percent.

Standard Chartered Plc this week lowered Korea's GDP growth outlook to 1.4 percent from 5 percent. The expansion cooled to 0.6 percent in the third quarter, the weakest pace since 2004, as exports declined the most in seven years and consumer spending weakened.

South Korea should play the role of a ``mediator'' in seeking regional cooperation to overcome the global crisis, Hyun said. An increase in bilateral currency swaps with China and Japan would help to ease liquidity concerns for banks and companies, he said.

``Korea is well placed to play the role of a mediator in the region at times like these,'' Hyun said. ``It has close ties with China, Japan as well as the U.S. and can make this an opportunity to play a bigger role in the global economic bloc.''

South Korea, China and Japan agreed on Nov. 15 to expand their foreign-exchange swap arrangements. South Korea currently has a $4 billion agreement with China and a $13 billion deal with Japan.

`The More the Better'

``The more the better for a country to have currency swaps as it allows a bigger safety mechanism for liquidity,'' he said.

South Korea secured a $30 billion currency swap from the Federal Reserve on Oct. 30. The nation's benchmark stock index rose by a record that day, and the won surged 14 percent. The Kospi index has lost 46 percent of its value this year, while the won has tumbled 35 percent against the dollar.

Hyun majored in economics at Seoul National University and has a Ph.D. from George Washington University. He started his career at the Economic Planning Board, which later became the Ministry of Finance and Economy. He worked at the World Bank and the Organization for Economic Cooperation and Development before joining the presidential office in 2002-2003.

To contact the reporter on this story: Seyoon Kim in Seoul at Skim7@bloomberg.net