Central Bank to Buy Bank Bonds, Cut Interest Rate

The Bank of Korea will reportedly purchase bank bonds to help cash-strapped domestic banks, and could cut the key interest rate as early as today.

In a separate move, the government will roll out comprehensive measures to help the ailing economy.

In a parliamentary speech on next year’s budget today, President Lee Myung-bak will urge bipartisan efforts and prompt handling of the budget plan to ride out the economic crisis

The central bank said its Monetary Policy Committee will discuss today measures to include bank bonds in repurchase agreements and cut its benchmark interest rate, which is now five percent.

“The final decision will be made by the committee, but chances are that the bank will decide to buy back bank bonds and lower the key interest rate,” a bank official said.

The purchase of bank bonds will raise liquidity in commercial banks and lower interest rates on certificate of deposits, which, in turn, will lead to a decline in mortgage rates and ease the burden of households.

Financial authorities are also considering cutting both the won and foreign currency liquidity ratios to inject liquidity into the banking sector.

In an emergency meeting on the economy at the presidential office yesterday, President Lee decided to announce “sweeping” measures to counter the financial crisis soon.

The measures will reportedly include extra government spending and additional tax cuts; swift parliamentary approval of state guarantees for domestic banks` foreign debts; improvement of the current account balance through export expansion, energy conservation and alleviating the travel account deficit; and stimulating corporate investment and job creation.

To encourage corporate investment, the schedule for deregulation of construction and development the Seoul metropolitan region could be eased. The Knowledge and Economy Ministry said, “To increase domestic consumption, the government is reviewing deregulation of factory construction in the Seoul metropolitan and greenbelt areas. To help the auto industry, a cut in the consumption tax for vehicles is also on the agenda.”