South Korea’s central bank today slashed key interest rate by 75 basis points, its largest cut ever, in a bid to rejuvenate the ailing economy and stabilize its stock market. The Korean won plunged to a 10-year low last week while Samsung Electronics, the country’s biggest company, reported its 3rd quarter net profit was down 44% from a year ago to $1.15 billion.
The Bank of Korea (BOK) announced the cut in the benchmark 7-day repurchase agreement rate to 4.25% at a special meeting. The cut came less than a month after a reduction of 25 basis points on October 9. Economists said the size of the reduction indicated the central bank’s all-out effort to shield the East Asian country from the effects of the global credit crunch.
Korea is Asia’s fourth largest economy and registered 5% growth last year. Its financial markets have been pummeled by fears that recent sweeping government measures to bolster the banking and construction sectors may not be sufficient.
The BoK’s data showed the South Korean economy grew by 3.9% over the same period a year earlier, falling from the 4.8% and 5.8% posted in the second and first quarters respectively, and the slowest pace for the third quarter since 2004.
The economy is expected to slow down further next year as exports, which account for about 40% of gross domestic product, battle declining demand in key markets like the United States.
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,” the BoK 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.
