South Korea tried to stem market worries on Monday, with the central bank at an emergency meeting making its biggest interest rate cut ever. Investors, however, continued to sell the local currency.
The Bank of Korea cut its benchmark interest rate by 75 basis points to 4.25 per cent – its second reduction this month. Lee Seong-tae, the governor, hinted at more rate cuts, citing sluggish consumption and slowing export growth, and said the bank planned to buy up to $7bn (€5.6bn, £4.5bn) of bank bonds. The BoK said it would include local banks' bonds in its repurchase deals to provide more liquidity.
“Domestic demand is slowing fast while it is hard to be confident that exports will continue to remain strong going forward,” Mr Lee said.
After falling heavily to below 900 points, Seoul’s Kospi share index closed up 0.8 per cent at 946.45. The won fell 1.3 per cent against the dollar to a 10-year low. Treasury prices surged, pushing the benchmark three-year yield to its lowest in more than three years.
The Bank of Korea will allow exporters to borrow dollars to pay for their mounting foreign-exchange losses and let small companies roll over foreign-currency debt for one year.
The bank’s action came as President Lee Myung-bak vowed to boost fiscal spending and cut taxes next year and repeated the government's readiness to inject liquidity into the financial sector.
Mr Lee said South Korea was not experiencing a repeat of the Asian financial crisis a decade ago, in which Seoul was forced to take a $57bn bail-out from the International Monetary Fund to avoid a national default. “I can say with absolute certainty, there is no foreign currency crisis in South Korea right now,” he told parliament. “The government hopes to expand the proactive role of fiscal spending in preparation for a slump in the real global economy.”
Analysts said the drastic rate cut was needed to reduce financial burdens on small companies and households but cautioned that it could add pressure on the Korean won, which has lost about 35 per cent of its value against the dollar this year.
Lee Dong-gull, president at the Korea Institute of Finance, said: “The government's primary concern is to prevent a vicious circle as the global financial crisis threatens to spread into the real economy, which could in turn bring down the financial sector. It is too early to say whether these measures are sufficient enough to prevent such a vicious circle.”
Government data last week showed that the Korean economy expanded 3.9 per cent in the third quarter from last year, the slowest pace of increase in three years.
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