South Korea's central bank slashes key interest rate

Source: Agencies  |   2008-10-27  |     ONLINE EDITION

SOUTH Korea's central bank slashed its key interest rate today by three-quarters of a percentage point -- its biggest cut ever -- to prevent Asia's fourth-largest economy from lurching into recession.

The country's president also said the government would cut taxes and boost public spending.

The stock market rose for the first first time in a week after a volatile session. The Korea Composite Stock Price Index, which rose as much as 2.9 percent and dropped as much as 5 percent, closed 0.8 percent higher at 946.45. It had lost one-fifth of its value last week amid a global market sell-off.

The won continued to slide against the US dollar, falling 1.4 percent to close at 1,442.50. The South Korean currency has declined more than 35 percent this year against the greenback.

The Bank of Korea lowered its benchmark seven-day repurchase rate from 5 percent to 4.25 percent at a rare unscheduled meeting. Spokesman Kim Seong said the cut was the largest ever under the current policy framework, established in 1998.

The bank said in a statement that a big cut was needed "to guard securely against the possibility of a sharp contraction of real economic activity" as the global financial crisis pounds the country's financial markets and threatens to tip other major economies into recession.

Separately, South Korean President Lee Myung-bak told the National Assembly that his government would increase public spending and reduce taxes to boost the economy.

But South Korea's difficulties are not comparable to what the country suffered a decade ago during the 1997-98 financial crisis, he said, citing us$240 billion of foreign currency reserves and declining global oil and raw material prices.

"What matters is rather the psychological aspect," he said. "The most dreadful foe we have to guard against is overreacting and being engulfed in fear that exceeds reality."