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South Korea May Cut Rate to Record-Low 1.75% as Slump Deepens |
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DATE |
2009-03-12 09:04:55 |
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South Korea May Cut Rate to Record-Low 1.75% as Slump Deepens
By Seyoon Kim, March 11, 2009
March 12 (Bloomberg) -- The Bank of Korea may cut its interest rate by at least a quarter-point today to a record low to revive an economy facing its first recession since 1998 as exports tumble.
The central bank will trim the seven-day repurchase rate to 1.75 percent, the seventh reduction since October, according to seven of 15 economists surveyed by Bloomberg News. Five expect a half-point cut to 1.5 percent and three forecast no adjustment.
Governor Lee Seong Tae said last month he is “open” to paring borrowing costs further and Finance Minister Yoon Jeung Hyun pledged to add to the government’s 51 trillion won ($34.5 billion) in stimulus spending. India, Indonesia and the Philippines all reduced borrowing costs in March and New Zealand is forecast to cut its benchmark rate to a record low today as the global recession slashes world trade.
“The focus of monetary policy will be placed on preventing the real economy from slumping further,” said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. “Exports have fallen, and weakening domestic demand is an added burden on the economy.”
The Bank of Korea’s seven-member board meets at 9 a.m. in Seoul and a decision is usually announced before 11 a.m. The board has lowered borrowing costs by 3.25 percentage points since Oct. 9, the most aggressive easing undertaken since the bank began setting a policy rate a decade ago.
The economy contracted 3.4 percent last quarter from a year earlier, the first decline since 1998, as exports to Europe, the U.S. and China plunged and rising unemployment prompted Korean consumers to slash spending.
‘Ever-Deepening Slump’
Yoon, who took office last month, says the government will present a stimulus package to parliament for approval by the end of March. Goldman Sachs Group Inc. this week forecast the economy, Asia’s fourth-largest, will shrink 4.5 percent in 2009.
“We live in an ever-deepening global slump,” Yoon said on March 5. “I will take bold, swift and preemptive fiscal and financial measures” to support the economy and “supply sufficient liquidity to make capital flow in the market.”
As well as increased spending, South Korea has injected $39 billion of U.S. currency into the banking system to help companies that face a shortage of dollars and a struggle to refinance overseas loans amid the global credit-market freeze.
The government also is setting up a 20 trillion-won fund to replenish bank capital as bad loans increase and another fund that will buy distressed corporate bonds.
Yoon said last week that the U.S. will probably agree to an extension of its $30 billion currency-swap arrangement with South Korea.
The World Bank this week forecast the global economy will shrink in 2009 for the first time since World War II and that trade will fall by the most in eight decades. Exports of cars, ships, mobile phones and other goods make up more than 60 percent of South Korea’s gross domestic product.
Global Rates
The global economic deterioration has forced central bankers around the world to lower borrowing costs. The European Central Bank cut its rate to a record-low 1.5 percent last week and the Bank of England pared its rate to 0.5 percent.
The Reserve Bank of New Zealand will trim its policy rate to 3 percent today, according to a survey of economists.
“The possibility of a further rate cut is still open,” Bank of Korea Governor Lee said after last month’s cut. “Policy will focus on improving the liquidity situation for the time being and also keeping” the economy from deteriorating.
Recent economic reports all point to a worsening slowdown. Overseas shipments fell 17.1 percent in February, extending the longest run of declines since 2002. Industrial production plunged a record 25.6 percent in January as exporters cut output and idled factories.
“I think there will be further cuts to take the benchmark rate target down to a low of 1 percent as Korea’s recession deepens,” said George Worthington, chief economist at Thomson Reuters IFR in Sydney.
Resource from www.bloomberg.com |
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