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Strategies & Market Trends : Korea

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To: Paul Kern who wrote (194)10/26/2008 9:47:14 PM
From: Paul Kern   of 214
 
Bank of Korea Cuts Key Rate a Record 75 Basis Points (Update1)

By William Sim and Seyoon Kim

Oct. 27 (Bloomberg) -- The Bank of Korea slashed interest rates by the most ever in an attempt to restore confidence after stocks lost a fifth of their value and the won fell to a decade low last week. Stocks rose.

Governor Lee Seong Tae lowered the seven-day repurchase rate by 75 basis points to 4.25 percent, the central bank said in a statement in Seoul today. The cut follows the first reduction in four years on Oct. 9. The meeting was still taking place at 9:55 a.m. in Seoul and a briefing will follow.

President Lee Myung Bak yesterday convened an emergency meeting of the nation's top economic policy makers, including Finance Minister Kang Man Soo and central bank Governor Lee, to discuss measures to combat financial market turmoil. The bank said today it would ease rules on foreign-currency lending to help local exporters.

``There isn't much President Lee's administration can do to shield the economy from external shocks, but their efforts will help the markets and the economy,'' said Oh Suktae, economist at Citibank Korea Inc. in Seoul.

Japan's government will compile a package of measures after stocks slumped last week, Finance Minister Shoichi Nakagawa said last night. The Nikkei 225 Stock Average fell today to the lowest since 1982 before rebounding.

Stocks Slump

``Emergency meetings by policy makers around the world reflect their fear and the severity of financial turmoil,'' said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. ``They are on the right track and this excessive volatility in markets should calm soon.''

South Korea's Kospi stock index rose 1.3 percent at 9:65 a.m. in Seoul. The index plummeted 20 percent last week. The won traded at 1,421.45 against the dollar from 1424 late Oct. 24. The won closed near the lowest level against the dollar in a decade on Oct. 24, extending this year's loss to 35 percent.

Under the new currency lending rules announced today, South Korea will allow exporters to borrow dollars to pay for the currency-related losses. Also small businesses, which borrowed mostly in Japanese yen, can extend their foreign-currency loans for another year. The won has plummeted 45 percent against the yen this year.

``The Bank of Korea seems determined to stop the market panic from the U.S. financial crisis spreading,'' said Chun Chong Woo, an economist at SC First Bank Korea Ltd. in Seoul.

President Lee returned this weekend from a Beijing meeting of Asian and European leaders at which they called for an overhaul of World War II-era banking rules. It was the first meeting of Asian and European Union chiefs since calls for coordinated action mounted amid bank failures and plunging stock prices that began in September.

Federal Reserve

Federal Reserve policy makers, meeting this week, are forecast to lower interest rates for a second time this month to try to thaw frozen credit markets and prevent a deepening recession.

South Korea last week pledged $130 billion to support lenders as the credit crunch saps local banks' access to foreign funds, and said they will spend as much as 8 trillion won to rescue builders struggling with unsold homes. The central bank said Oct. 24 it will inject 2 trillion won ($1.4 billion) into the financial system through repurchase-agreement operations.

Economy Cools

A report last week showed the $970 billion economy expanded 3.9 percent in the third quarter from last year, the slowest pace since 2005, and down from 4.8 percent growth in the second quarter.

``We have turned more cautious on the economic outlook on the ongoing turbulence in the global financial markets,'' said Kwon Goohoon, economist at Goldman Sachs Group Inc. in Seoul in a note.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net
Last Updated: October 26, 2008 20:57 EDT
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