South Korea, Taiwan May Cut Interest Rates as Recession Deepens

By William Sim and Janet Ong

Dec. 11 (Bloomberg) -- South Korea and Taiwan will probably cut interest rates today to shore up economies buffeted by declining demand for exports amid recessions in the U.S., Japan and Europe and weakening growth in China.

The Bank of Korea will reduce its key rate a half-point to 3.5 percent, a three-year low, according to 10 of 16 economists surveyed by Bloomberg News. Taiwan’s central bank may trim its benchmark to 2.25 percent from 2.75 percent, the biggest cut since September 2001, a separate survey showed.

The World Bank said yesterday East Asia’s economies face “hard times,” forecasting international trade will shrink in 2009 for the first time in more than 25 years. South Korea’s Hynix Semiconductor Inc. released plans this week to eliminate 30 percent of its executives and slash labor costs by more than 15 percent; Taiwan’s AU Optronics Corp. cut forecasts for shipments and prices this quarter as customers pare purchases.

“Both central banks should act to lessen the pain and cushion their economies as much as possible,” said Vishnu Varathan, a regional economist at Forecast Singapore Pte. “It will pay for them to be aggressive and frontload interest-rate cuts as the global economy is heading south in a hurry and China’s outlook is deteriorating.”

Korea’s won has fallen 45 percent versus the dollar this year, Asia’s worst-performing currency, and its stock index has dropped 40 percent. Taiwan’s Taiex index of shares has slumped 45 percent.

Rate Decisions

The Bank of Korea meets about 9 a.m. in Seoul and a decision is due before 11 a.m. local time. The Central Bank of the Republic of China (Taiwan)’s board gathers at 3:30 p.m. in Taipei and announces its verdict at 4:20 p.m.

Taiwan and South Korea have joined policy makers globally in pumping funds into their financial systems, slashing borrowing costs and increasing government spending to fight a deepening economic slump.

South Korea plans a 14 trillion won ($10 billion) stimulus in 2009. Taiwan will spend an extra NT$400 billion ($12 billion) over the next four years, including building new bridges and highways and providing shopping vouchers.

“It’s a matter of how much the Bank of Korea will cut rates as the economy is cooling faster than expected,” said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul, who expects the rate to be reduced to 2.5 percent by the first half of next year.

Exports Tumble

South Korea’s exports dropped by the most in almost seven years last month as shipments to China, the nation’s biggest overseas market, tumbled 27.8 percent. The economy expanded last quarter at the weakest pace since 2004.

A further reduction today would extend the Bank of Korea’s most aggressive round of easing since it began setting a policy rate in 1999. Governor Lee Seong Tae already has slashed the benchmark by 1.25 percentage points since September.

Taiwan’s central bank has lowered its discount rate on 10- day loans to banks by a total of 87.5 basis points over four moves since Sept. 25.

The island’s economy will sink into a recession this year after shrinking in the third quarter for the first time since 2003, the government said on Nov. 20. Exports fell 23.3 percent in November, the most in seven years, as shipments to China and the U.S. slumped.

‘More Aggressive’

“It’s better for Taiwan to take a more aggressive stance on rates than to adopt a slow pace that won’t be as effective,” said Cheng-mount Cheng, an economist at Citigroup Inc. in Taipei.

Five of eight economists, including Cheng, forecast a 50 basis-point cut today. Two see a quarter-point adjustment and one predicts a 100 basis-point move.

Cheng expects Taiwan’s central bank may also lower the reserve requirement ratio today to encourage the island’s banks to step up lending. “The issue with Taiwan banks is that they are unwilling to lend. It’s not a liquidity issue.”

Following is a table of forecasts for the Bank of Korea’s interest rate today, by the end of the first and second quarters of 2009:

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KOREA INTEREST RATE FORECASTS    Dec.       1Q         2Q
                                2008      2009       2009
--------------------------------------------------------------
Median                           3.50%     3.00%     2.88%
Average                          3.53%     2.98%     2.65%
High Forecast                    3.75%     3.25%     3.00%
Low Forecast                     3.25%     2.50%     1.50%
Number of Participants             16        12        12
--------------------------------------------------------------
Action Economics                 3.50%     3.00%     2.75%
Citi                             3.50%     3.00%     3.00%
Daewoo Securities                3.50%     3.00%     3.00%
DBS Group                        3.50%     3.25%     3.00%
Forecast Pte                     3.50%      ---       ---
Good Morning Shinhan Secs        3.75%     3.25%     3.00%
Hana Daetoo Securities           3.50%     3.00%     3.00%
HMC Investment Securities        3.75%     3.25%     3.00%
Hyundai Securities               3.50%     3.00%     2.50%
Mirae Asset Securities           3.50%     3.00%     2.50%
Moody’s Economy.com              3.25%     2.75%     2.50%
Morgan Stanley Dean Witter       3.75%      ---       ---
Nomura International HK          3.50%      ---       ---
Reuters IFR                      3.25%     2.50%     1.50%
SC First Bank                    3.50%     2.75%     2.00%
Westpac Banking Corp             3.75%      ---       ---
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To contact the reporters on this story: William Sim in Seoul at wsim2@bloomberg.net; Janet Ong in Taipei at jong3@bloomberg.net.