South Korea Cuts Interest Rate to Record Low 2%

South Korea's central bank slashed interest rates by half a percentage point to a record low of 2 percent, as expected, the sixth cut in four months aimed at preventing the global crisis tipping the country into recession.

The Bank of Korea has now cut interest rates by a total of 3.25 percentage points since early October, including an unprecedented 1 percentage point reduction in December.

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A media official from the central bank announced the latest cut on Thursday without elaborating. Governor Lee Seong-tae is due to hold a news conference shortly.

"Today's rate decision was a defensive measure against a rapidly weakening economy," said June Park, an economist at Woori Investment & Securities.

"We are nearly at the bottom at this point. The central bank may cut the rate by another 50 basis points, but that's probably about it, as the real effect of the rate cut is limited at this stage."

March treasury bond futures were at 112.06 in morning trade, up 20 ticks on the day, rebounding from earlier losses, while the South Korean won eased to 1,397 per dollar from around 1,396 before the rate cut.

The stock market's benchmark KOSPI was little changed at around 1,180 points after the rate decision.

South Korea's economy shrank a seasonally adjusted 5.6 percent in the fourth quarter of 2008 from the previous three months, suffering its second-biggest economic contraction on record.

The finance ministry this week cut its GDP growth forecast for 2009 to a fall of 2 percent from a rise of 3 percent, the first official acknowledgement that the economy would contract this year. The IMF has projected a 4 percent contraction.

Ten of 17 analysts in a Reuters poll had predicted a 50 basis-point cut. The others forecast a 25 basis-point reduction.

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The BOK said that its future monetary policy would focus on improving liquidity and economic conditions.

"The (Monetary Policy) Committee will do what is needed to improve liquidity conditions and to ward off the risk of a severe slowdown in economic activity," the Bank of Korea said in a statement after slashing the base rate by 50 basis points.

The central bank said that despite the latest signs of thawing in the credit crunch, firms still faced considerable difficulty in raising funds due to highly risk-averse financial institutions.

Copyright 2009 Reuters. Click for restrictions.