South Korea’s central bank cut its key interest rate yesterday for the third time in a month, saying the economy was slowing down faster than expected amid the global financial turmoil.
The Bank of Korea reduced the benchmark seven-day repurchase rate for this month by a quarter of a percentage point to 4 percent, with analysts saying further cuts could be made soon.
On Oct. 27 the bank announced its largest-ever interest rate cut of 75 basis points, following a 25 basis points reduction on Oct. 9.
South Korea is trying hard to stimulate sluggish domestic demand because of a likely slowdown in its crucial export sector amid international economic gloom.
On Monday the government announced a US$10.7 billion stimulus plan.
Last month it disclosed plans to spend some US$5 trillion won (US$3.78 billion) to boost the slumping construction industry — 2 trillion won to buy unsold apartments from builders and 3 trillion won to buy land from them.
“The growth of the Korean economy is expected to sharply cool as financial market jitters are affecting the real economy,” the central bank said in a statement.
Central bank chief Lee Seong-tae said growth had been slowing faster than expected.
“Since the export outlook is expected to be bad along with domestic demand, so economic growth could show a considerable slowdown [at least] until the first half of next year,” he told a press conference.
One factor behind the easing monetary policy is the ailing real estate market, he said.
The economy grew 0.6 percent quarter-on-quarter in July to September, the slowest quarter-on-quarter growth in four years. Households and smaller firms struggling with mounting debt have increasingly been cutting spending.
A currency swap agreement reached with the US Federal Reserve last week has eased downward pressure on the won and given the central bank more scope for interest rate cuts.
“The central bank may reduce the rate to 3.25 percent until the first half of 2009, given cooling economic growth,” said Lee Sung-kwon, an economist at Goodmorning Shinhan Securities.
Goldman Sachs said a further 50 basis points cut was likely by the middle of next year. It forecast year-on-year growth of just 2.8 percent in the fourth quarter of this year and in the first quarter of next year.
Moody’s Economy.com said the latest rate cut showed the central bank believed the worst of the financial turmoil was over, with the won stabilizing and policymakers would be keen to boost domestic-driven growth.
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