Bank of Korea Hints at Further Rate Cuts

The Bank of Korea yesterday hinted at further interest rate cuts when its Monetary Policy Committee holds its monthly meeting Friday.

The central bank will also likely take drastic measures to ease the credit crunch through direct funding to the corporate financial market and expansion of the types of stocks eligible for its purchase of securities as collateral from banks for its loans.

“The Bank of Korea will implement its rate policy with a focus on reviving the sagging economy and improving fund flows for this year, as inflation is expected to show a downward move,” the bank said.

This statement came in a report released yesterday on the direction of the bank’s monetary and credit policy this year.

The Bank of Korea also said, “The bank will proactively cope with the possibility of a further worsening of the economy with interest rate policy, and will preemptively counter the impact of the situation in the international financial market on the domestic economy.”

Most finance experts predict the bank will cut the benchmark interest rate, which is three percent, by a quarter to half a percentage point, considering that the country`s growth rate fell below zero in last year’s fourth quarter from the third.

Others, however, say a freeze could be in the cards since last month saw a record-high cut of one percentage point.

The central bank also plans to expand the types of credit securities it takes as collateral when making loans to commercial banks. To be accepted are corporate commercial papers, which involve default risks, in addition to government, public and currency stabilization bonds.

The cap on low interest loans will be raised for small and medium-size enterprises by changing the allocation method to one based on lending to banks in proportion to the amounts of their corporate loans. This is intended to prompt banks to extend loans to smaller companies.

Ways to ease the credit crunch will include aggressive liquidity supply in preparation for a possible contraction of the financial market’s function to bridge funds. Liquidity could go directly to companies through the purchase of commercial papers, among other contingency measures.

The central bank will also likely change its role to help stabilize the financial market.

Bank of Korea Governor Lee Seong-tae said in his New Year’s message, “As the lender of last resort, the central bank must seriously consider and hold in-depth discussions about its role in stabilizing the financial market,” suggesting the need to revise the Bank of Korea Act on the bank’s role as inflation fighter.

jaeyuna@donga.com