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central bank-loan cap

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(Globalpost/GlobalPost)

SEOUL, March 28 (Yonhap) -- South Korea's central bank on Thursday kept its ceiling on soft loans to small and medium enterprises (SMEs) at the current level for the second quarter amid the slowing economy.

The monetary policy committee of the Bank of Korea (BOK) decided to leave the cap at 9 trillion won (US$8.1 billion) for the coming quarter, trumping expectations that the ceiling may be raised to ease smaller firms' funding squeeze.

The loans, which the BOK extends through commercial banks to SMEs, carry an annual interest rate of 1.25 percent. The loan cap is determined on a quarterly basis.

In September, the BOK expanded the size of the loans by 1.5 trillion won in an effort to support smaller companies suffering from the economic slowdown.

The BOK's decision to freeze the cap spawns speculation that the central bank may cut the key interest rate to 2.5 percent at the April rate-setting meeting, experts say.

More analysts are betting on a rate cut for April, saying that the BOK will eventually lower the borrowing costs to lend support to the government's economic stimulus.

Earlier in the day, the government sharply cut its 2013 growth outlook to 2.3 percent from some 3 percent, vowing to pursue additional budgets, in a bid to bolster the slowing economy.

Analysts said that the BOK will most likely lower its growth projection from its current 2.8 percent on April 11, spurring bets that a rate cut will come as well.

"The government's downgrade of the growth outlook raised bets that the BOK will cut the benchmark rate in April to join efforts to support the economy," said Hong Jung-hye, a fixed-income analyst at Shinyoung Securities Co. "The bond markets began to factor into chances for two rate cuts this year."

Bond prices, which move inversely to yields, ended sharply higher. The return on three-year Treasurys declined 0.13 percentage point to 2.45 percent due to market players' strong bets on a rate cut.

Market players have been divided over the BOK's rate outlook as BOK Gov. Kim Choong-soo recently expressed views seemingly discordant with the government over the assessment of economic conditions.

The governor said that the local economy is not likely to further deteriorate and even expressed concerns about a long streak of low rates, sparking speculation that a rate cut may not be in the cards.

The BOK froze the key interest rate at 2.75 percent for the fifth straight month in March after cutting it in July and October last year. The next rate review is slated for April 11.

The BOK's soft loan scheme is one of its main tools for financial inclusion by expanding loans to SMEs with low rates when the economy slows down.

The BOK raised the cap by a combined 3.5 trillion won to 10 trillion won between October 2008 and March 2009 in a bid to help smaller companies cope with the liquidity crunch sparked by the global financial crisis.

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http://www.globalpost.com/dispatch/news/yonhap-news-agency/130328/central-bank-loan-cap-0