WRAPUP 2-South Korea cuts rates by record margin, more seen

SEOUL, -South Korea's central bank slashed interest rates by a record 1 percentage point to an all-time low on Thursday and warned that Asia's fourth largest economy was on the verge of an emergency that may require more drastic action. The Bank of Korea cut the base rate to 3.0 percent, marking the fourth reduction since early October when the rate was 5.25 percent. It now stands at the lowest since the rate-setting system was adopted in 1999. "We are on the verge of an emergency situation that may need more drastic policy," Bank of Korea Governor Lee Seong-tae told reporters, saying future policy would focus on lifting the economy and easing a credit crunch. Some economists believe the South Korean economy is heading into recession and analysts said the much bigger-than-expected rate cut and the central bank's comments all raised chances it would cut rates further. "It is not a good policy to keep waiting longer and take steps in a gradual manner," governor Lee said of the central bank's biggest ever rate cut. Nine of 10 analysts in a Reuters poll had forecast a cut by 50 basis points in the base rate, with the remaining analyst predicting a 25 basis-point dip. For a graphic on the South Korean base rate, double-click: https://customers.reuters.com/d/graphics/KR_RTS1208.jpg "This drastic move suggests Korea's economic growth is in real danger of a big slowdown and the Bank of Korea is ready to take further aggressive measures, as it has been attacked for not doing much to stabilise the financial market and economy," said Park So-yeon, an economist at Korea Investment and Securities. South Korea, saddled with high foreign debt, a weakening currency, capital outflows and doubts about the health of its banking sector is seen among the region's most vulnerable economies to the global financial crisis that has already pushed the United States, Japan and Western Europe into recession. Seoul has responded with a slew of emergency measures, including $130 billion in foreign debt guarantees and nearly $10 billion in fiscal stimulus, on top of aggressive central bank easing. MORE CUTS AHEAD Economist Park Sang-hyun at HI Investment & Securities said he was downgrading his rate outlook: "I had expected the rate to be lowered to as low as 2.75 percent, but the rate may go below 2 percent." The Bank of Korea also said it would add 12 brokerage houses to those eligible for its repurchase agreement operations, a move that will help non-banking institutions secure funds more easily. December treasury bond futures soared as much as 114 ticks to 110.80 as investors priced in higher chances for additional, aggressive rate cuts. Seoul stock market's benchmark KOSPI rallied immediately after the decision but has soon given back some of the gain as investors turned their attention back to the stark prospects for South Korea's economy and corporate earnings. Won was up 2.2 percent against the dollar by 0252 GMT, also retreating from its rise of nearly 4 percent immediately on profit-taking and on the gloomy economic prospects. The drop in benchmark rate of 2.25 percentage points, if followed by an equivalent drop in bank lending rates, should save South Korean companies and consumers some $30 billion in annual interest payments on their debt, Reuters calculation shows. The latest move comes amid media reports in the region that Japan and China were close to agreeing on expanding currency swap arrangements with South Korea to help their smaller neighbour restore confidence among international investors. The Bank of Korea is due to release its first official forecasts for 2009 economic growth on Friday with mounting fears the economy could register its first annual decline in 11 years in 2009. South Korea's economy expanded 5 percent in 2007 but the growth is seen slowing to around 4.5 percent this year and more than halving to around 2 percent next year, with some global investment banks even predicting an outright contraction in 2009.