South Korea cuts key bank interest rate to fend-off recession

The Bank of Korea yesterday cut its benchmark seven-day repurchase rate by a quarter of a percentage point to 3%.

This surprise move by the central bank is seen by analysts as an serious attempt to stave off financial turmoil and a possible recession generated by Europe’s persistent debt woes and declining economic growth in China.

“We expect the rate cut will help the South Korean economy return to a long-term growth trend,” said Kim Choong-soo, Bank of Korea governor.

He said the rate hike would not affect consumer prices this year, and that its impact would be negligible on next year’s consumer price index, a gauge for inflation.

The lower borrowing costs should boost spending among businesses and consumers and help the economy nudge forward in a trying environment.

The rate cut also seems to have been driven by concerns the U.S. economy is showing signs of weakening while Europe’s economic woes appear to be worsening.

The central bank expects the pace of global economic recovery to be more moderate than originally forecast, and judges the downside risks to growth to be intensifying further.

South Korea’ Ministry of Finance last month said it expected the economy to expand 3.3% this year from 2011 compared to an earlier forecast of 3.7%.

The rate cut was South Korea’s first since February 2009, when the central bank lowered its policy rate by 50 basis points to a record low of 2%. The central bank, however, raised key interest rates in five times between July 2010 and June 2011 to 3.25% as low borrowing costs increased inflationary pressures.

Market analysts said the central bank is likely to further ease its monetary policy ahead of December presidential elections since its aim now seems to have moved towards growth over price stability.

Shares at the KOSPI fell after the surprise interest rate cut, fueled by worries about the state of the flagging global economy. The rate cut also raised concerns among investors that the global economic downturn is taking a heavy toll on Asia's fourth-largest economy