S.Korea c.bank under growing pressure to cut rates
Reuters - Thursday, November 6
By Yoo Choonsik and Seo Eun-kyung
SEOUL, Nov 6 - South Korea's government said risks to economic growth were increasing while inflation keeps easing, adding pressure on the central bank to make good on market expectations for a third interest rate cut in a month on Friday.
Central bank data released on Thursday showed September money supply growth and October household lending growth both hit a 9-month low, indicating there was no immediate danger of lower interest rates leading to inflationary credit growth.
More troubling, according to the Ministry of Strategy and Finance's monthly assessment of Asia's fourth-largest economy, is that a slump in domestic demand is deepening just as global demand is cooling in the aftershocks of the markets turmoil.
"The market consensus is for another cut in interest rates tomorrow. You may argue how much lower interest rates will help the economy in this turbulent situation, but you should also bear in mind there is little that authorities can do otherwise," said Park Sang-hyun, economist at HI Investment and Securities.
The chief presidential economic aide was quoted by media as saying exports, on which the economy relies more heavily than before for growth, would slow a lot next year after this year's rise of around 20 percent.
The Bank of Korea slashed its policy rate by 1 percentage point in two steps in October, including an emergency cut by three-quarters of a point last week, and is widely expected to cut it some more -- by as much as 50 basis points -- at its regular meeting on Friday.
The volatile financial markets also highlighted worries among investors about the the fate of the global economy and financial industry, which could make the Bank of Korea feel more pressured to ease monetary policy.
Seoul stock market's benchmark KOSPI <.KS11> shed more than 7 percent and the won <KRW=> skidded 5 percent, as anxiety about the uncertain future persuaded traders to dump South Korean assets in favour of safer investments or cash.
Economic figures released after the Bank of Korea cut rates last week showed the country's economy was fast running out of steam as the global financial crisis prompted consumers and companies to cut spending.
Consumer sentiment hit a 3-month low in October, confidence among manufacturers for November hit a historic low, September industrial production shrank for a third straight month and October export growth hit a 13-month low.
The government announced an $11 billion package this week, that includes a sharp expansion in fiscal spending on construction projects and tax cuts for next year, and pledged more to keep the local economy on growth track.
The South Korean economy could suffer growth falling to as low as 2.2 percent in 2009, the slowest since 1998, from just over 4 percent this year, Moody's Investors Service forecast.
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