04 Jan 2009
Jan. 4 (Bloomberg) -- The Bank of Korea said it will focus its monetary policy this year on supporting the sagging economy and improving access to credit."We'll manage the benchmark interest rate with a focus on improving economic and financial-market conditions," the central bank's board said in a statement today on its 2009 policy. "We'll seek ways to ease the credit squeeze such as providing liquidity actively."
The central bank cut the key rate by 100 basis points to a record low of 3 percent on Dec. 11, extending the most aggressive round of easing since it began setting a policy rate in 1999. The economy probably shrank last quarter from the third quarter, the first contraction since early 2003, Governor Lee Seong Tae said last week.
"The central bank, which cut rates aggressively last year, is making it more clear they're ready to take more action to prevent the economy from sliding further," said Lee Sung Kwon, an economist at Good Morning Shinhan Securities Co. in Seoul. "The Bank of Korea can't be alone when global central banks are easing policies in the face of a slump."
The Bank of Korea's policy direction comes a day after Finance Minister Kang Man Soo said the economy will recover in the second half of this year following a contraction in the fourth quarter. President Lee Myung Bak said last week the nation will run an "economy-emergency government" to fight the worst economic crisis since its $57 billion bailout by the International Monetary Fund in 1997.
Tax Cuts
Policy makers also have also pumped funds into the financial system, boosted public spending and cut taxes to cushion the economy against fallout from the global credit crisis, which sent the Korean won down 26 percent against the dollar and the Kospi stock index tumbling 41 percent in 2008.
"We will do all we can to help the economy," Kang said yesterday on KBS television in Seoul. "The government has the ability to further increase spending and cut taxes." The government has already unveiled cuts in taxes worth 35 trillion won ($26 billion) and 16 trillion won of extra spending, he said.
The Korean won has risen 8 percent and the Kospi has jumped 20 percent since South Korea secured a $30 billion swap line with the U.S. Federal Reserve on Oct. 30 and the government announced measures to stimulate the economy.
The central bank forecasts that annual economic growth will slow to an 11-year low of 2 percent in 2009 from an estimated 3.7 percent pace last year.
Rates Outlook
South Korea's exports fell more than 15 percent for a second straight month in December. Industrial production fell by the most on record in November and confidence among manufacturers tumbled to the lowest level ever.
Central bank Governor Lee signaled last month the central bank may cut rates further when the board meets on Jan. 9, saying the possibility is "always open" for more reductions.
Good Morning Shinhan Securities' Lee expects the central bank to cut rates by 50 basis points this week at its policy board meeting.
"Exports are sagging faster than expected while domestic demand remains weak," Lee of Good Morning said. "I wouldn't be surprised if the BOK lowered rates to 2 percent in the first half of this year."
