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Bank of Korea Sharply Cuts Economy's Growth Forecasts

South Korea's central bank sharply cut its economic growth forecasts for this year and next after trimming interest rates for the second time this year to shore up Asia's fourth-largest economy on Thursday, its governor said.

Bank of Korea Governor Kim Choong-Soo
Bank of Korea Governor Kim Choong-Soo

The Bank of Korea cut this year's economic growth forecast to 2.4 percent from 3.0 percent set in July and that for next year to 3.2 percent from 3.8 percent, Governor Kim Choong-soo told reporters.

The announcement came after the central bank interest rates for the second time in four months on Thursday, as expected, to nurture Asia's fourth-largest economy through a global slowdown now dragging on for an extended period.

The Bank of Korea's monetary policy committee cut its base rate by 25 basis points to 2.75 percent, a media official said without elaborating. Governor Kim Choong-soo is expected to hold a news conference from 11:20 a.m. (0220 GMT).

Many analysts expect the Bank of Korea to stay on hold for a considerable period unless the conditions significantly worsened, as the economy is seen recovering gradually and as it wants to save the policy room for a worse time.

"There will be no more rate cuts this year," said Park Sang-hyun, chief economist at HI Investment & Securities.

"I agree with the finance minister that our economy has hit bottom during the third quarter. However, the most important factor is how strongly our economy will recover."

In July, the central bank trimmed the rate by a quarter point from 3.25 percent in a surprise move and for the first time in more than three years, ending a tightening drive that had lifted the rate by a total of 125 basis points.

The BOK is the latest authority to join a wave of global monetary easing, as central banks look to counter the debilitating effects of the protracted euro zone fiscal crisis. Brazil's central bank earlier Thursday cut its policy rate by 25 basis points to a record low 7.25 percent.

Trade powerhouse South Korea has seen its exports and imports fall for many of the past nine months on an annual basis as Europe's protracted debt crisis dented demand there and elsewhere, in turn hitting local consumer spending.

The economy now looks set to see quarterly growth in the July-September period at a similar pace to the second quarter, when expansion plunged to 0.3 percent from 0.9 percent in the January-March period.

South Korea's economy derives just more than half of its annual output from private consumption but exports wield a strong influence across the economy as households and companies rely heavily on export income.

Exports fell year-on-year in each of the past three months, and industrial output contracted in each of the three months until August month-on-month, indicating growth in the third quarter would be at a low level.

The International Monetary Fund lowered on Monday its annual growth forecast for South Korea's economy for this year to 2.7 percent from 3.0 percent. It was part of the lender's revision of global economic forecasts.

The annual rates of consumer and producer inflation both rose in September from August but stood far below the central bank's 3 percent target as the uncertain global economy dampened demand locally, allowing the authorities to ease policy.