Nov. 7 (Bloomberg) -- South Korea cut interest rates by a quarter point, the third reduction in a month, to prevent the economy from sinking into its first recession since the nation needed an International Monetary Fund bailout a decade ago.

Central bank Governor Lee Seong Tae lowered the seven-day repurchase rate to 4 percent in Seoul today, adding to the 1 percentage point in cuts in October. Twelve of 16 economists surveyed by Bloomberg News expected a reduction.

Lee has undertaken the most aggressive round of cuts since the bank started setting a policy rate in 1998, striving to limit economic damage from the global credit crisis that has sent Korea's won down 32 percent this year and the stock index plunging 45 percent. India, Japan and Australia lowered rates in the past week as the financial turmoil that has pummeled the U.S. and Europe threatens to engulf Asia's export-dependent economies.

``The Bank of Korea is joining global efforts to prevent a recession and can't afford to be an outsider,'' said Park Sang Hyun, an economist at HI Investment & Securities Co. in Seoul.

The Bank of England slashed its benchmark rate by 1.5 percentage points yesterday and the European Central Bank lowered its rate by a half-point. The IMF yesterday predicted economic contractions in the U.S., Japan and euro region next year, calling for further interest-rate cuts and fiscal stimulus.

``The committee will do what is needed to ward off the risk of a severe slowdown in economic activity brought about mainly by financial-market unrest,'' the Bank of Korea said. As well, the board will keep a ``vigilant watch'' on inflation, it added.

`Very Aggressive'

The Kospi stock index fell 0.7 percent to 1,085.14, less than declines in Asian equity markets today. Korea's won slipped 0.5 percent to 1,336.7 versus the dollar at 10:21 a.m. in Seoul.

``The central bank probably will cut rates further because, like other countries, Korea is clearly under a lot of pressure going through this financial turmoil,'' said David Cohen, director of Asian forecasting at Action Economics in Singapore. That said, South Korea has been ``very aggressive'' in taking steps to aid its economy compared with Asian neighbors, he added.

South Korea has pumped funds into the banking system, guaranteed lenders' debts and secured an Oct. 30 agreement from the Federal Reserve to provide $30 billion in U.S. currency. The measures are aimed at easing the freeze in credit markets and a shortage of U.S. dollars that has stoked concern the nation's banks wouldn't be able to refinance their offshore borrowings.

The won advanced after the Fed swap deal was announced and default protection costs on Korean government debt fell by the most in more than four years.

Time to Act

``Concerns about foreign-currency liquidity seem to have mostly diminished and now is the time to take more close care of the real economy,'' President Lee Myung Bak said this week.

Finance Minister Kang Man Soo unveiled a 14 trillion won ($10.5 billion) package of extra spending and corporate tax breaks this week, adding to almost $20 billion in income-tax reductions announced in September.

South Korea's slowdown is deepening. Economic growth cooled to the weakest in four years last quarter as exports declined the most in almost seven years and consumer spending stagnated.

Exports, the main engine of the economy's 10-year expansion, rose at the weakest pace in 13 months in October as shipments to China, South Korea's biggest market, fell for the first time since 2002.

Job Losses

In September, jobs growth slowed to the weakest pace since 2005 as manufacturers and builders cut workers. Retail sales gained by the least in nine months.

Hyundai Motor Co., South Korea's second-biggest exporter, on Oct. 23 slashed its global vehicle-sales forecast for the year. Posco, the region's biggest maker of stainless steel, said last month it will cut output by about a third this quarter to cope with slowing demand.

The central bank also cut the rate on special loans for small-and medium-sized companies to 2.25 percent from 2.5 percent.

Consumer prices rose 4.8 percent in October, the smallest gain in six months, providing room for further rate reductions. Inflation peaked at 5.9 percent in July.

Economists from Capital Economics Ltd. and SC First Bank Ltd. forecast South Korea's benchmark rate will be cut to 2 percent by mid-2009 as the economy falters.

``The bank probably didn't cut rates more than 25 basis points today because more reductions on the way,'' said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. ``You don't want to use up all your bullets at once.''

To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net

Last Updated: November 6, 2008 21:28 EST