Bank of Korea cuts key interest rate to 4 percent

South Korea's central bank cut its key interest rate Friday for the third time in less than a month, stepping up efforts to stave off a sharp slowdown in an economy pummeled by the global financial crisis. Stocks rallied.

The Bank of Korea announced during a regular policy meeting that it had lowered its benchmark seven-day repurchase rate to 4 percent from 4.25 percent, the lowest level since June 2006.

The widely expected move followed hefty interest rate cuts overnight in Europe. The Bank of England slashed its key rate by 1.5 percentage points and the European Central Bank eased half a percentage point. Other central banks, including the U.S. Federal Reserve and the Bank of Japan, have slashed rates to boost their slumping economies.

"The domestic economic slowdown persists," the South Korean central bank's monetary policy committee said in a statement, which also highlighted instability in stocks and the difficulties companies are having raising funds because of tight credit conditions.

South Korea's economic growth slowed in the third quarter to 3.9 percent, its lowest level in three years as construction contracted and a global slowdown hit manufacturing and exports, the central bank said last month.

South Korea's benchmark stock index rallied Friday to close higher after a sharp decline before the rate cut. The South Korean won inched higher.

The Korea Composite Stock Price Index, or Kospi, jumped 42.27 points, or 3.9 percent, to 1,134.49 after falling as much as 4.9 percent.

The won closed at 1,328.80 to the U.S. dollar, up 0.2 percent, after opening 2.5 percent lower.

The rate cut follows one of a quarter percentage point on Oct. 9 and another of three quarters of a percentage point on Oct. 27 - the biggest ever - at an emergency meeting.

In its statement, the committee suggested more easing, saying it "will do what is needed to ward off the risk of a severe slowdown in economic activity brought about mainly by the financial market unrest."

Economists say more rate cuts are sure to come.

"We expect the economy to deteriorate much further from here," said Lim Ji-won, an economist at J.P. Morgan in Seoul.

She said the bank could lower its key rate as much as another full percentage point in monthly increments to 3 percent by the end of March. "This is a global recession."

In addition to the rate cuts, South Korean financial authorities have taken various steps to boost the world's 13th-largest economy.

The government last month unveiled a $100 billion plan to guarantee overseas loans taken out by the country's banks and a 14 trillion won ($10.5 billion) economic stimulus package for next year. The Bank of Korea announced a $30 billion currency swap agreement with the Fed.

The Kospi has declined 40 percent so far this year as foreign investors have fled South Korean stocks. The outbreak of the global financial crisis accelerated losses at one point to over 50 percent.

The recent policy measures by the government and central bank and gains on Wall Street have helped stabilize local stocks.

The Kospi rose for five straight sessions through Wednesday before falling Thursday and early Friday after two days of steep declines in U.S. stocks. South Korean and other Asian markets often take their cue from movements on Wall Street.

The won, which has also fallen sharply as stocks have dropped, is down nearly 30 percent so far in 2008.