SKorea cuts key rate, lowers growth forecasts

[October 11, 2012]  SEOUL, South Korea (AP) -- South Korea's central bank cut its key interest rate Thursday for the second time this year and slashed growth forecasts as Asia's fourth-largest economy faces mounting threats from the protracted debt crisis in Europe and a worsening global slowdown.

The Bank of Korea's seven-member policy board lowered the benchmark seven-day repurchase rate by a quarter of a percentage point to 2.75 percent. The bank cut its growth forecast for this year to 2.4 percent from 3 percent. It lowered its forecast for next year to 3.2 percent from 3.8 percent.

"We expect this rate cut to help South Korea's economy recover growth," Bank of Korea Governor Kim Choong-soo said at a briefing.

"External conditions worsened more than we expected. Because slumping growth in South Korea's economy stems from the worsening external conditions rather than internal problems, we need to respond to that."

The central bank lowered borrowing costs for the second time this year after holding the rate steady in the previous two months. The last rate reduction to 3 percent from 3.25 percent was in July and was the first rate cut in more than three years.

A rate cut this month was widely expected among analysts as the latest economic data showed growth in South Korea's economy was losing steam amid weakening overseas demand for the country's exports. Exports account for about half of South Korea's economy.

Sales at department stores and discount chains have retreated in recent months, showing South Korean consumers are hesitant to spend due to economic uncertainty despite government efforts to boost the local economy.

The strengthening of the local currency against the U.S. dollar was also expected to hurt the competitiveness of exporters by making their products more expensive abroad, adding pressure to South Korea's trade-reliant economy and reinforcing the case for the rate cut.

The central bank said growth in South Korea's economy continues to lag behind its full potential. It said this underperformance is likely to persist for some time due to the prolonged European debt crisis and the "enduring sluggishness" of the global economy.

In addition to trimming the key policy rate, the Bank of Korea board reduced the annual interest rate for loans extended to small and medium enterprises through commercial banks. It was the first reduction since March, 2010.

The Bank of Korea's growth forecast revision comes after similar moves by institutions at home and abroad. The International Monetary Fund on Tuesday reduced its growth forecast for South Korea's economy this year by 0.3 percentage point to 2.7 percent. It estimated 3.6 percent growth for next year, down from an earlier forecast of 3.9 percent.

"We reduced our growth forecasts because the economic output in the second and the third quarters were much lower than we expected," said Shin Woon, director-general of Bank of Korea's research department. "The prolonged slump in the eurozone is negatively affecting domestic consumer sentiment and investment."

Even though consumer spending is likely to revive next year, the pace would be moderate due to a housing market slump and high household debt, Shin said. In 2013, exports would also pick up at a modest pace due to a recovery in international trade and stimulus measures boosting the economy of China, which is South Korea's biggest export market.

[Associated Press; By YOUKYUNG LEE]

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