Bank of Korea Cuts Interest Rate to Record Low of 3%

By William Sim

Dec. 11 (Bloomberg) -- The Bank of Korea cut its benchmark interest rate to a record low of 3 percent in an effort to prevent the global economic crisis from pushing the economy into its first recession since 1998.

Governor Lee Seong Tae and his board reduced the seven-day repurchase rate by 100 basis points, the most since the bank began to set a policy rate in 1999, in Seoul today. The economy will cool rapidly as export growth slows faster than expected, the bank said in a statement.

The won surged as much as 3.6 percent after the decision on optimism the central bank's action may help cushion the economy. Policy makers worldwide are reducing borrowing costs to fight a recession that's forcing Hynix Semiconductor Inc. and other companies to cut output and sack workers.

``More steps will be needed to limit the impact of the global economic and financial crisis on South Korea's economy,'' said Lim Ji Won, a senior economist at JPMorgan Chase & Co. in Seoul. The size of the reduction was a ``surprise,'' he said.

The won gained 2.2 percent to 1364 versus the dollar at 10:36 a.m. in Seoul.

Today's cut is the fourth reduction in eight weeks and marks the most aggressive round of easing since the central bank began setting a policy rate in 1999. None of the 16 economists surveyed by Bloomberg News forecast the size of the reduction.

The rate for smaller companies was lowered by 50 basis points to 1.75 percent.

The economy grew at the slowest pace in four years last quarter as exports dropped and consumer spending stagnated. The central bank may forecast the slowest economic growth in 11 years in its 2009 outlook due tomorrow, the Herald Business newspaper reported yesterday, without saying where it got the information.

World Bank

The World Bank said yesterday East Asia's economies face “hard times”, revising down its 2009 growth forecast for the region to 5.3 percent from the previously estimated 7.4 percent in April. International trade will shrink next year for the first time in more than 25 years, it said.

South Korea is pumping funds into banks, cutting taxes, boosting public spending and slashing borrowing costs to limit the fallout from the global credit crisis and recession, which sent the Korean won and stock index down by about 40 percent this year.

The Bank of Canada trimmed its benchmark rate by 75 basis points this week. The European Central Bank cut its main rate by the same margin to 2.5 percent on Dec. 4, the same day the Bank of England chopped its rate by one percentage point to 2 percent.

Governor Lee hinted at further cuts after reducing the benchmark to 4 percent on Nov. 7, saying his board is focused on “keeping the economy from weakening too much.”

Export Growth

South Korea's exports fell by the most in almost seven years last month as shipments to China, the nation's biggest overseas market, tumbled 27.8 percent.

South Korea's jobless rate climbed 3.3 percent in November, the highest since July 2007, as businesses cut workers to cope with the faltering economy.

“As the downturn in exports and domestic sales deepens, we expect firms to cut jobs further,” said Kwon Young Sun, an economist at Nomura International Ltd. in Hong Kong. “We expect employment to fall outright in 2009, for the first time in six years.''

Hynix Semiconductor, the world's second-largest computer memory chipmaker, said this week it'll eliminate 30 percent of its executives and slash labor costs by more than 15 percent.

Hyundai Motor Co. and other South Korean carmakers have cut production at home and abroad to cope with slowing demand. Posco, Asia's third-biggest steelmaker, is slashing planned output by about a third this quarter.

Consumer prices rose 4.5 percent in November, the smallest gain in seven months, providing the central bank room for further rate cuts. Inflation peaked at 5.9 percent in July.

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