BOK Cuts Call Rate by 0.25 Percentage Point

The Bank of Korea (BOK) decided to cut the call rate by 0.25 percentage point to 4% in a bid to stimulate the slumping economy. The decision came on Tuesday when the monetary policy committee, the BOK`s policy setting body, convened. The central bank said that because of worries that the growth rate could drop below the 4 percent range this year, it decided to cut the rate.

This is the BOK`s first call rate change since May last year, when it raised the call rate, benchmark short-term interest rate that banks charge on overnight loans between banks, to 4.25% from 4% to prevent the overheating of the economy.

"Severe acute respiratory syndrome (SARS) only is expected to trim this year`s growth rate by 0.3 percentage point and exports by $1.4 billion," BOK Governor Park Seung said. "We have yet to take into account the negative impact of North Korea’s announcement of possessing nuclear arms on the economy."

He explained that without economic stimulus measures, it is difficult to achieve a more than 4% growth rate and that the rate cut decision would be effective in boosting the economy.

According to a BOK analysis, if the growth rate stands at the four percent mark, the economy can create 200,000 new jobs. Every one-percentage-point-drop below the four percent in growth means loss of 100,000 jobs.

However, despite the anticipated rate cut, the benchmark 3-year treasury bonds` interest rate fell 0.05 percentage point to 4.34%, the lowest figure this year, from the previous day’s 4.39%.

Economic experts forecast that because the interest rate cut was already reflected in bonds’ yields, they would rebound when the rate is actually cut.

Kwu-Jin Lim Suk-Ho Shin mhjh22@donga.com kyle@donga.com