BOK May Cut Key Rate
By Kim Jae-kyoung
Staff Reporter
The Bank of Korea (BOK) is expected to cut its rate further, following the lead of central banks in the United States and Europe on their way to zero interest rates.
On Thursday, the European Central Bank cut its key rate to 2.5 percent from 3.25 percent, the most aggressive reduction in the bank's 10-year history. Both the Bank of England and Sweden's Riksbank also cut their rates aggressively to 2 percent.
The U.S. Federal Reserve is also expected to make a deep rate reduction at an upcoming meeting slated for Dec. 16. The Fed's key rate is already at a historic low of 1 percent.
A global wave of bold rate cuts, aimed at warding off recession and revitalizing credit markets, illustrates that the global economy is deteriorating at an unexpectedly fast pace.
Rising worries over a deepening global recession from other central bankers is expected to put increasing pressure on the BOK to be more aggressive at its monetary policy committee meeting scheduled for Dec. 11.
There are three clear reasons for the BOK to take a drastic step forward. First, the economic downturn is deepening in line with the collapse of exports. Exports dipped 18.3 percent in November year-on-year, the largest setback in seven years, and the central bank should be looking at ways to boost domestic demand to offset this.
Secondly, inflation has stabilized thanks to a continuing fall in international oil and raw material prices. Finally, the BOK is not capable of steering itself away from other central banks that have taken unprecedented action to avoid a global economic crisis.
Market analysts said that the BOK will cut its base rate by 50 basis points to a historic low of 3.5 percent this month and continue its monetary easing by mid-2009 in a bid to prevent the economy from slipping into a recession.
``With the economic cycle firmly in a downturn, we expect the BOK to cut its key rate by 50 basis points to 3.5 percent this month,'' Goldman Sachs economist Kwon Goo-hoon told The Korea Times.
He forecast a maximum 150 basis point cut by mid-2009, citing the severity of the down cycle, rapidly receding inflationary pressure, and prospective rate cuts by central banks in developed economies and other countries in the region. Goldman forecast that the Korean economy would register negative growth in the first quarter of next year.
Citigroup economist Oh Suk-tae also said that with the possibility of a recession in Korea increasing quickly, the BOK will likely indeed become more aggressive, expecting the central bank to eventually reduce interest rates to around 2 percent.
ING Group forecast a cumulative 100 basis point easing by the end of the first quarter next year, while Standard Chartered Bank expects a 50 basis point cut this month.