South Korea Implements Third Rate Cut in Past Month

November 7, 2008

Emerging economies have not been insulated from the global slowdown. Acting preemptively, the Bank of Korea sliced its Base Rate to 4.0% from 4.25% and hinted more relief will be coming. Today’s move follows reductions of 75 basis points on October 27th and 25 bps on October 9th, which ended a prolonged streak of tightening totaling 200 bps from a trough of 3.25% in 2005. A statement released today by the central bank pledged to “do what is needed to ward off the risk of a severe slowdown in economic activity brought about mainly by the financial market unrest while keeping a vigilant watch on the changes in the upside risk to inflation.” Consumer price inflation has already crested in spite of depreciation in the won. Export and consumption growth is slowing and evoking special concern. Difficult credit conditions and unstable stock prices add to the downside growth risks facing Korea. Real GDP advanced 2.3% saar in 3Q and 3.9% from 3Q07, while consumer prices rose 5.1% in the year to September, more than double their gain in the previous statement year.


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