Key Rate Likely to Be Cut to 1%
By Kim Jae-kyoung
Staff Reporter
The central bank will lower its key rate to as low as 1 percent to minimize the economic downturn, Standard Chartered forecast, Tuesday.
In its outlook report, released after disappointing fourth quarter GDP data last Thursday, the U.K. bank said that more rate cuts and quantitative easing was inevitable.
``Sluggish demand is likely to drive inflation lower, removing any remaining concerns over the rapid pace of rate cuts in the fourth quarter of 2008,'' SC First Bank economist Chun Chong-woo said in a research note.
``As such, we now look for the target rate to be cut to 1.0 percent from the current 2.5 percent. The monetary policy committee meeting on Feb. 12 may see a 50 basis points cut,'' he added.
The Bank of Korea (BOK) reported last Thursday that the Korean economy shrank 5.6 percent in the fourth quarter, the biggest contraction in 11 years since the economy contracted 7.8 percent in the first quarter of 1998.
He pointed out that the economy has become more susceptible to funding stresses for the corporate sector, as local banks choose not to extend credit due to risk aversion.
``We may see (the central bank's) liquidity injection into commercial papers or corporate bonds via a special-purpose company in addition to the expected rate cuts, helping to spread liquidity throughout the economy at a time when banks are very reluctant to pass it on,'' he said.
Citing weaker-than-expected domestic demand, Standard Chartered downgraded its 2009 growth outlook to minus 1.2 percent from an earlier prediction of 1.4 percent.
It pointed out that in the fourth quarter, the domestic demand contribution to GDP growth collapsed from 2.3 percentage points to negative 5.0 percentage points, mainly due to a sharp drop in private consumption