Bank of Korea Cuts Rate to Record as Recession Looms

By William Sim

Jan. 9 (Bloomberg) -- The Bank of Korea cut its interest rate by a half-point to a record low, following similar moves by Taiwan and Indonesia this week to revive Asia’s export-dependent economies buffeted by the global economic slowdown.

Governor Lee Seong Tae and his board lowered the seven-day repurchase rate to 2.5 percent in Seoul today, the fifth reduction since October. “The economy is deteriorating rapidly as demand cools faster than expected at home and abroad,” the bank said in a statement.

Record-low rates add to the government’s 140 trillion won ($105 billion) in tax cuts, spending and liquidity injections to aid an economy that President Lee Myung Bak says may contract in the first half. Weakening demand prompted Renault Samsung Motors Co. and Ssangyong Motor Co. to idle plants in December, and Hynix Semiconductor Inc. has announced plans to fire workers.

“The economy is diving,” said Oh Suk Tae, an economist at Citigroup Inc. in Seoul. “It’s a matter of by how much policy makers can keep it from falling further.”

Today’s decision was expected by 15 of 17 economists surveyed by Bloomberg News. The central bank has cut rates by 2.75 percentage points since Oct. 9, the most aggressive easing undertaken since the bank introduced a benchmark a decade ago.

Indonesia slashed borrowing costs by a half point on Jan. 7. Taiwan cut its rate by a similar amount at an unscheduled meeting after a report showed a record slide in exports.

Stocks, Currency

The Kospi stock index fell 1.3 percent to 1,189.85 at 10:15 a.m. in Seoul, led by shares in exporters. Korea’s won rose 0.4 percent to 1,328.25 against the U.S. dollar after dropping 26 percent in 2008, Asia’s worst-performing currency.

South Korean President Lee this week launched a so-called economic war room inside an underground bunker at his office, shifting his administration into emergency mode to fight the worst crisis since the nation needed an International Monetary Fund bailout in 1997.

“An outright recession in Korea in 2009 now looks inevitable,” said Kwon Young Sun, a Hong Kong-based economist at Nomura International Ltd. “They will need to take more action in coming months.”

Kwon expects South Korea’s rate to be cut to 1.5 percent by the end of the first quarter.

The central bank said this week it will focus 2009 policy on supporting the sagging economy and improving access to credit.

After President Lee’s first emergency meeting yesterday, the government said it will provide an additional 50 trillion won in loans and credit guarantees to small businesses.

Economic Contraction

Banks’ loan-delinquency ratio rose to a three-year high in November as more companies fell behind on repayments, the Financial Supervisory Service said Dec. 23.

“We expect the contraction in economic activity to continue in the coming months,” Eva Yi and Kwon Goohoon, economists at Goldman Sachs Group Inc., wrote in a report. Still, “domestic demand may recover in the second half of 2009 with fiscal stimulus, rate cuts and falling commodity prices.”

Domestic car sales dropped 5.3 percent to a three-year low of 1.15 million vehicles in 2008, Korea Automobile Manufacturers Association said this week. Hyundai Motor Co. and Kia Motors Corp. have cut their employees’ working hours as demand slows.

Exports declined for a second straight month in December, industrial production fell by the most on record in November and confidence among manufacturers tumbled to the lowest level ever.

Hynix Semiconductor, the world’s second-biggest maker of memory chips, said last month it would eliminate 30 percent of its executives and cut labor costs by more than 15 percent.

The Bank of Korea forecasts annual economic growth will slow to an 11-year low of 2 percent in 2009 from an estimated 3.7 percent pace last year.

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