Bank of Korea Cuts Key Rate a Record 75 Basis Points (Update2)

Oct. 27 (Bloomberg) — The Bank of Korea slashed interest rates by a record at an emergency meeting in an attempt to restore confidence after stocks lost a fifth of their value and the won fell to a decade low last week.

Governor Lee Seong Tae lowered the seven-day repurchase rate by 75 basis points to 4.25 percent and cut rates on special loans for small and medium-sized companies to 2.5 percent from 3.25 percent, the central bank said in a statement in Seoul today. It will also accept bonds issued by commercial banks as collateral in its money-market operations, giving them access to more funds.

President Lee Myung Bak, who met Finance Minister Kang Man Soo and central bank Governor Lee yesterday, said today the country is far from experiencing a repeat of the 1997 financial crisis when it needed a $57 billion loan from the International Monetary Fund.

“The Korean authorities felt compelled to take dramatic action in the face of global turmoil,” said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. “The rate cut might provide a brief boost to the financial market but the general panic environment prevails.”

South Korea’s Kospi stock index fell 0.8 percent at 10:55 a.m. in Seoul after earlier rising as much as 3 percent. The index plummeted 20 percent last week. The won sank to 1,441.60 against the dollar from 1,424, extending this year’s drop to 35 percent.

Japan’s Measures

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.

“Emergency meetings by policy makers around the world reflect their fear and the severity of the 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.”

“A large cut in the base rate is called for in order to guard securely against the possibility of a sharp contraction of real economic activity,” the bank said in a statement, adding it would attempt to ward off a slowdown in economic growth and keeping a watch on inflation.

Currency Rules

The bank said today it would also ease rules to make it easier for exporters to borrow dollars. Also, small businesses that borrowed mostly in Japanese yen can extend their foreign- currency loans for another year, it said. The won has fallen 45 percent against the yen this year.

“The Bank of Korea will likely cut rates again at their monthly rate-setting meeting next week,” Chun Chong Woo, an economist at SC First Bank Korea Ltd. in Seoul. “The Bank of Korea seems determined to stop the market panic from the U.S. financial crisis spreading.”

The Bank of Korea last week raised the limit on so-called total loans to 9 trillion won ($6.2 billion) from 6.5 trillion won. Total loans are offered to commercial banks at a special interest rate — lower than the nation’s benchmark rate of 4.25 percent — with the funds earmarked for small and medium-sized businesses.

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.

President Lee held the emergency meeting on returning from a Beijing gathering 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.

South Korea last week pledged $130 billion to support lenders struggling to obtain foreign funds and said it 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 into the financial system through repurchase- agreement operations.

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