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Korea’s rate cut of 75 basis points the largest ever


October 27, 2008

Financial Crisis Impact:
Korea’s rate cut of 75 basis points the largest ever

South Korea’s central bank Monday cut its key interest rate by 75 basis points, the largest reduction in the country's history, to try to protect its economy from the global financial turmoil, reported AFP.

The Bank of Korea (BOK) announced the cut in the benchmark 7-day repurchase agreement rate to 4.25 per cent at a special meeting.

The stock market last week suffered its biggest weekly decline and the won plunged to a 10-year low.

The cut came less than three weeks after a reduction of 25 basis points.

Economists said the size of Monday's reduction indicated the central bank's all-out effort to shield Asia's fourth largest economy from the effects of the global credit crunch.

Local financial markets have been rattled by fears that recent sweeping measures to bolster the banking and construction sectors may not be strong enough.

On Friday the central bank announced that the economy grew at its slowest pace for four years in the third quarter, due to a faster than expected downturn in exports and sluggish domestic demand.

The economy is expected to slow down further next year as exports, which account for about 40 per cent of gross domestic product, battle declining demand in key markets like the United States.

"The larger-than-expected rate cut came as a surprise. The BOK seemed to be making an effort to swiftly stabilise the markets with an aggressive rate cut," Kim Jae-Eun, an economist at Hana Daetoo Securities, told Yonhap news agency.

The central bank also relaxed restrictions on loans to exporters, especially those which suffered massive losses on currency derivatives contracts when the won plunged against the dollar.

"Losses at small and medium-sized companies, which have signed for currency options products... have sharply increased. As such, the possibility of bankruptcy and financial difficulties have sharply increased (for these companies) and have become a key factor in the slowdown of the real economy," it said in a statement.

The bank also said it will let some firms postpone their repayment of foreign-currency borrowings for at least two years due to the recent sharp fall of the won against the dollar and the Japanese yen.

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