MarketWatch: Swiss national bank cuts rates to near zero

The Bank of Korea (BoK) stunned currency and stock markets this morning with record 1 per cent cut in interest rates that far exceeded expectations and points to a much deeper economic crisis than Seoul had expected.

The BoK slashed the base rate by 1 per cent to 3.0 per cent, in a cut that was twice as severe as the most dovish forecasts.

It was the fourth cut in two months, the latest move in the most aggressive series of gambits since the central bank won its independence in 1999.

Although stock investors responded positively to the surprise cut, and the won climbed to a one-month high against the US dollar, some economists now believe that the pace of economic deterioration in South Korea is so rapid that the country cannot avoid falling into its first recession since the Asian Financial Crisis a decade ago.

Analysts at Société Générale believe that, in contrast with the Korean government’s own forecasts for marginal growth in 2009, the economy is on course to contract by about 1 per cent.

The collapsing export scene in Asia and the spiralling crisis in the global shipping industry have all but destroyed hopes that South Korea might survive the downturn in the relatively comfortable position of “sandwich economy” between China and Japan.

In a sinister warning to investors that suggested a degree of panic among financial policymakers, the central bank said that the country was on the brink of an “emergency” and that further, more dramatic action might soon be required.

Those measures, said BoK governor Lee Seong-tae, might include directly injecting capital into sectors of the economy that have been most violently squeezed by the credit crunch.

“It is not a good policy to keep waiting longer and take steps in a gradual manner,” said Mr Lee after announcing the unprecedented rate cut.

The financial authorities in Seoul are under heavy fire for their handling of the crisis.

The plunging won has so far been very helpful to Korean exports and made key manufactured goods like electronics highly competitive against those of Japanese rivals.

But repeated efforts to stabilise the currency and the rest of the economy have not been successful and the country’s high level of foreign debt is viewed by many economists as a potentially dangerous liability as the global downturn deepens.

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