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28.10.2008 International

South Korea cuts rates to 4.25%

By The Statesman

South Korea's central bank has cut its key interest rate to 4.25% from 5% in an attempt to boost one of Asia"s biggest economies.

It is only the second time in history Bank of Korea has cut interest rates at an emergency meeting.

The bank said the rate cut was needed "to guard securely against the possibility of a sharp contraction of real economic activity'. Some analysts think the bank may be forced to lower rates again.

Goldman Sachs economist Kwon Goohoon called the rate cut 'decisive and provocative', adding that at least one more cut of half a percentage point was likely early next year.

 'Additional rate cuts are possible. A cut in rates might take place in December but more likely early next year,' said Meritz Securities economist Cho Seong-joon.

South Korean shares closed higher on Monday for the first time in several days, while the won continued to fall against the US dollar.

South Korean President Lee Myung-bak told the country's parliament the government was going to cut taxes and increase public spending.

He said the current situation could not be compared to the 1997-1998 financial crisis.

'What matters is rather the psychological aspect,' he said.

'The most dreadful foe we have to guard against is over-reacting and being engulfed in fear that exceeds reality.'

Earlier this month South Korea had already taken several steps to protect the economy from the global financial crisis.

These measures included a $135bn government package to help struggling banks, and cutting interest rates by a quarter of a percentage point.