South Korea’s central bank carried out its biggest interest rate cut ever yesterday, slashing borrowing costs by a full percentage point to a record low in a bid to stave off recession.
The Bank of Korea lowered the benchmark seven-day repurchase rate to 3 percent from 4 percent at a regular policy meeting.
“There is now judged to be a strong likelihood that growth will fall sharply as a result of the worldwide economic slowdown along with the financial market unrest including the credit crunch,” the bank’s policy committee said in a statement.
Deteriorating economic data have raised alarm bells that Asia’s fourth-largest economy could contract next year on an annual basis for the first time since 1997, when the country was in the throes of the Asian financial crisis. Exports fell 18.3 percent last month from the same month last year.
Citibank Korea economist Oh Suk-tae said the size of the rate cut was “surprising” and suggests that the bank thinks growth could be zero next year given South Korea’s weakening exports and China’s first fall in exports in seven years last month.
Yesterday’s rate cut marked the fourth time the central bank has lowered borrowing costs in the past two months and exceeded the 0.75 percentage point emergency cut on Oct. 27, previously the largest ever.
Bank of Korea Governor Lee Seong-tae said bold action was needed amid expectations the economy will quickly worsen.
“It is not a good policy if we wait longer or decrease the interest rate in several stages,” he said.
The benchmark rate has gone from 5.25 percent to 3 percent since Oct. 9.
The previous record low for the bank’s benchmark rate was 3.25 percent — last seen in October 2005.