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South Korea’s Surprise Rate Cut

Posted by: Ihlwan Moon on December 11, 2008

Taking the market by surprise, the Bank of Korea on Dec. 11 slashed its base rate to a record low 3% from 4%. The cut, which is much deeper than a 0.5-percentage-point reduction many economists had expected, demonstrates how policymakers are worried about the speed of Korea’s economic slowdown. The deepest rate cut since the Korean central bank began setting its policy rate in 1999 is the fourth reduction in eight weeks in the seven-day repurchase rate.

The move came after South Korea’s exports fell 11.3% year-on-year last month, the biggest fall in almost seven years, as shipments to China plunged 27.8%. China is the largest market for Korea’s exports, the country’s engine for growth. Many economists predict Korea’s economic growth will fall to well below 3% next year, against 5% last year.

The financial markets welcomed the central bank’s move. In early afternoon trading, the Korean won jumped 3.7% to 1,344 to the dollar, while the benchmark Kospi index on the Seoul bourse rose 1.5%.

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