South Korea cuts bank rates

South Korea reported its largest interest rate cut and promised more spending and tax cuts for next year to help its economic growth that has plunged to its four-year low and would surely be plunged further due to the global crisis.

"What investors really want isn't just a rate cut but measures to cure a liquidity squeeze," said Kim Joong-hyun, an analyst at Goodmorning Shinhan Securities. "It is the nervousness in the market that keeps credit tight."

Banks have particularly exposed itself to the credit crunch thus finding difficulty in rolling over foreign currency loans which is linked to major export deals by local companies.

Lacking of liquidity makes banks anxio0us to lend at home and prompted central bank’s rate cut.

The Monetary Policy Committee cut the base rate by 75 basis points to 4.25 percent. This is its first emergency rate cut since the days after the Sept. 11, 2001 attacks in the United States. And the second cut this month.

The central bank had cut rates by 25 basis points hours after a cut among major central banks world wide aimed at raising market confidence in the face of the deepest financial crisis in decades.

BOK might purchase bank bonds

Bank of Korea Governor Lee Seong-tae told reporters the central bank was also considering its first ever purchase of commercial bank bonds to put cash into the financial system.

"We have not decided how much liquidity we would inject with bond purchases, but we are considering 5-10 trillion won ($3.5-7.0 billion)," he told reporters.

Some analysts said the central bank may need to make more rate cuts.

"The rate cut could help lessen the burden of household debt and play a role as a stepping stone to boost the economy .Additional rate cuts are possible. A cut in rates might take place in December but more likely early next year," said Cho Seong-joon, economist at Meritz Securities.

Debt of South Korean household was 500 trillion won in total by the end of August. The ratio of debt to disposable income has increased sharply most especially debt to non-bank lenders that charge higher than banks.

The central bank also cut its special interest rate for small- and medium-sized companies by 75 basis points. These companies are the country's main employers, accounting for about 90 percent of the workforce.