Bank of Korea Cuts Target Rate to 3.0% from 4.0%

December 11, 2008

In South Korea, Asia’s fourth largest economy after Japan, China and India, the central bank target rate has been reduced 100 basis points, twice as much as forecast. Earlier cuts in the 7-day repo rate occurred on October 9th of 25 basis points, October 27th of 75 basis points, and November 7th of 25 basis points. The backdrop to today’s move is the weakest growth in four years and falling, though still above-target, inflation of 4.5%.

A statement released by the Bank of Korea predicts a sharp additional drop in economic growth and steady deceleration in inflation despite currency depreciation. The communique calls credit conditions “more difficult” because of capital outflows and tighter bank lending attitudes. The central bank also lowered Aggregate Credit Ceiling Loan rates, which apply to smaller firms, by 50 basis points to 1.75%, and promises to “do what is needed to improve liquidity conditions and to ward off the risk of a severe slowdown in economic activity” in the future. That sounds like a heavy likelihood that the target interest rate, although now below on-year inflation, will be cut again. The Monetary Policy Committee will meet next on January 10th. In the meantime, the government is moving ahead with a fiscal stimulus.

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