Record Rate Cut Has Minimal Effects on Financial Markets

The country’s biggest interest rate cut and President Lee Myung-bak’s promise to increase government spending yesterday failed to calm Korea’s financial markets.

The benchmark stock index KOSPI fell below 900 at one point in the day and the Korean won fell again versus the U.S. dollar.

The stock market, however, climbed slightly from the previous trading day in showing a better performance than its Asian counterparts as the government injected a large amount of pension funds into the market.

Not so fortunate was the won, as foreign investors affected by the global financial crisis kept selling in droves and drove down the domestic currency’s value.

The KOSPI rose 7.7 points (0.82 percent) to close at 946.45. With the interest rate cut, the index surpassed 960 points after the market opened. Domestic and foreign investors, however, dumped their stocks to drive the index below 900 before the market recovered.

The government’s injection of pension funds worth more than 500 billion won (346.7 million dollars) helped the stock market to revive slightly.

As the New York stock market tumbled over the weekend, China’s benchmark Shanghai Composite Index fell 6.32 percent and Hong Kong’s Hang Seng Index plummeted 14 percent. Japan’s Nikkei 225 dropped 6.36 percent to close at 7,162.90, the lowest since Oct. 7, 1982.

The Monetary Policy Committee of the Bank of Korea lowered the key rate a record 75 basis points to 4.25 percent.

The committee held its first emergency meeting to make a rate cut since Sept. 19, 2001, when it made a cut of 50 basis points to protect the economy from the aftermath of the terrorist attacks on the United States.

The committee also decided to cut the interest rate on loans to small- and medium-size enterprises from 3.5 percent to 2.5 percent and lend foreign currency to them. Such companies have suffered great losses from KIKO currency options.

Moreover, it plans to buy a portion of bonds issued by commercial banks worth 25.5 trillion won (17.5 billion dollars) to mature this month via repurchase agreements.

The won fell 20.5 points against the greenback to hit a new low since May 18, 1998, when the won-dollar exchange rate stood at 1,444. For the day, the won also lost ground versus the Japanese yen, closing at 1,546.09 per 100 yen, shattering all previous records.

The five-year Korea treasury bond yield dropped 28 basis points to close at 4.62 percent and that of the three-month certificate of deposit declined 14 basis points to 6.04 percent.

jarrett@donga.com parky@donga.com