South Korea Announces Record Interest Rate Cut

South Korea's central bank on Monday delivered its biggest ever interest rate cut and promised other measures to calm the panic that has been driving down financial markets and rapidly eroding economic growth.

CNBC.com

With economic growth at a four-year low and weakening, President Lee Myung-bak told parliament the government would boost spending and cut taxes next year and stood ready to inject liquidity into the system until markets calm.

The Monetary Policy Committee slashed the base rate by 75 basis points to 4.25 percent at a rare unscheduled meeting as fears grow that Asia's fourth largest economy is buckling under the strain of the global financial turmoil.

"This rate cut is sharper than we expected, and indicated policy makers are seriously aware of the risk of the global financial crisis fast spreading into the real economy," said Kong Dong-rak, economist with Hana Daetoo Securities.

The cut, the biggest since the central bank started its current system of setting base rates in 1999, gave a short-lived lift to share prices which had their worst week ever last week, falling some 20 percent.

Several analysts said more rate cuts looked likely.

"The rate cut could help lessen the burden of household debt and play a role as a stepping stone to boost the economy ... Additional rate cuts are possible. A cut in rates might take place in December but more likely early next year," said Cho Seong-joon, economist at Meritz Securities.
     
Central Bank Buys Bonds

In another first, the central bank said it considered buying up to 10 trillion won ($6.9 billion) of bonds issued by local commercial banks to provide extra liquidity for the cash-starved banking sector. 

But the overall economic concerns continued to press on markets.  By late morning, the main share index had given up its early gains to trade down 0.54 percent at 933.67 while the won continued to slip and was quoted at 1,440.80/42.10 to the dollar.

In a budget speech to parliament, Lee also said he would pursue deregulation of the financial services sector despite the global crisis to improve competition but also at the same time would tighten supervision to ensure capital is safeguarded.

Lee has already warned that Asia's fourth largest economy faces even graver danger than during the 1997/98 Asian financial crisis when the country was only rescued from sovereign default by a massive International Monetary Fund-led bailout.

But the government has said its currency reserves of about $240 billion -- the world's sixth largest -- and generally sounder fundamentals mean it is not looking to the IMF for help this time.

South Korea's banks, with their large short-term foreign borrowing, have looked especially vulnerable to the global credit crunch in their struggle to access funds along with the threat that rapidly slowing growth at home could push many of their corporate customers into bankruptcy.

To help, the Bank of Korea said it was cutting its special interest rate for small- and medium-sized companies by 75 basis points. Small companies account for about 75 percent of the country's work force and are struggling in the face of an economic downturn and tight domestic liquidity.

Senior presidential economic policy aide, Bahk Byoung-won, told reporters on Sunday that it was important to reduce the interest burden on smaller companies and households.

Bahk said it would be difficult this time for the economy to recover from the downturn as fast as it did after the Asian financial crisis a decade ago.

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