BOK Signals Steepest Rate Cuts in a Decade May End

By Seyoon Kim

April 10 (Bloomberg) -- The Bank of Korea’s most aggressive round of interest-rate cuts in a decade may be coming to an end.

Governor Lee Seong Tae and his fellow policy makers kept the benchmark rate unchanged yesterday for a second month, saying there are signs the economy’s deepest contraction in more than a decade may be abating.

Lee said yesterday the pace of South Korea’s economic slowdown had “moderated significantly” since the bank’s February meeting. Factory output gained for a second month in February and manufacturer confidence rose to a five-month high.

“We see no need for further rate cuts,” said Kwon Young Sun, an economist at Nomura International Ltd. in Hong Kong. “The Bank of Korea will have to focus more on controlling excess liquidity and asset inflation, which may become a problem in the aftermath of lower rates and extra spending.”

The government on March 24 unveiled plans to spend 17.7 trillion won ($13 billion) on cash handouts, cheap loans and job training to revive an economy that contracted in the fourth quarter by the most since 1998.

“We expect the Bank of Korea to pause in their next meeting as well,” Kwon Goohoon, an economist at Goldman Sachs Group Inc. in Seoul, said in a note.

Goldman’s Kwon said there could still be a 50 basis-point interest-rate cut later in the year though recent indicators and the central bank statement indicate that “the odds are somewhat lower than before.”

Slowdown Moderates

“Although domestic economic activity has not yet been able to pull out of its downturn, some indicators point to the moderation of the abrupt slowdown,” the central bank said. “There are signs that production activity in the manufacturing and services sectors is improving slightly.”

The bank revised its forecasts today, saying the economy will shrink 2.4 percent in 2009. In December it had predicted a 2 percent expansion.

“An economic recovery will be very slow,” Kim Jae Chun, director general at the central bank, told reporters in Seoul today. Kim said inflation will slow to a “2 percent level” from May, after consumer prices rose 3.9 percent in March.

The central bank’s new growth estimate compares with the economic contraction of 6.9 percent in 1998 at the height of the Asian financial crisis. The following year the economy expanded 9.5 percent.

Better Than 1998

“The economic situation is better than it was in 1998, when large conglomerates collapsed with massive job losses,” said Go You Sun, an economist at Daewoo Securities Co. in Seoul. “Exports and domestic demand remain weak mainly due to the global recession, but there’s hope things will turn around and that the policy steps already taken will help as well.”

Central banks across Asia have slashed borrowing costs and governments excluding Japan have unveiled more than $710 billion in increased spending, tax cuts and cash handouts.

Japan’s ruling Liberal Democratic Party yesterday proposed the government implement a 15.4 trillion yen ($154 billion) stimulus package, which would bring total extra spending since October to 25 trillion yen.

The Kospi stock index climbed 1.7 percent to 1,338.57 at 9:50 a.m. in Seoul, extending this year’s gains to 19 percent. The won, which was Asia’s worst performer last year, has risen 15 percent in the past month, making it the region’s best- performing currency.

Lee said yesterday he kept the door “open” for policy makers to add to the 3.25 percentage points in interest-rate cuts since early October.

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