Dec. 11 (Bloomberg) -- The Bank of Korea cut its benchmark interest rate to a record low of 3 percent in an effort to prevent the global economic crisis from pushing the nation into its first recession since 1998.

Governor Lee Seong Tae and his board reduced the seven-day repurchase rate by 100 basis points, more than estimated by all 16 economists surveyed by Bloomberg News, in Seoul today. The economy will cool rapidly as export growth slows, the bank said in a statement.

The won, Asia’s worst performing currency this year, surged as much as 3.6 percent after the decision on optimism the central bank’s action may help cushion the economy. Policy makers worldwide are reducing borrowing costs to fight a recession that’s forcing Hynix Semiconductor Inc. and Hyundai Motor Co. to cut output and fire workers.

“It’s a preemptive strike to guard against the likelihood of a recession,” said Hong Sung Koo, a bond fund manager with Daishi Securities Co. in Seoul. “The aggressive move will give a helping hand to markets reeling from the worsening prospects for the economy.”

The won gained 2.4 percent to 1,360.5 versus the dollar at 12:03 p.m. in Seoul.

Asked if the bank would lower rates again, Lee replied at a press conference: “I can only say the possibility is always open.” The bank can take emergency steps when local financial markets face serious liquidity crises, he said.

Today’s cut was the fourth reduction in eight weeks and marks the most aggressive round of easing since 1999.

Tax Cuts, Spending

As well as lowering borrowing costs, South Korea is pumping funds into banks, cutting taxes and boosting public spending to limit the fallout from the global credit crisis and recession, which sent the Korean won down more than 30 percent and the stock index tumbling by about 40 percent this year. The benchmark Kospi index rose 0.8 percent at 12:15 p.m. in Seoul.

“The economy is expected to slow down fast as local demand weakens further amid worsening economic and financial conditions at home and abroad,” the central bank said. “Exports are cooling considerably more than expected.”

The rate on special loans for small and medium-sized companies was lowered by 50 basis points to 1.75 percent.

The economy grew at the slowest pace in four years last quarter as exports dropped and consumer spending stagnated. The central bank may forecast the slowest economic growth in 11 years in its 2009 outlook due tomorrow, the Herald Business newspaper reported yesterday, without saying where it got the information.

‘Hard Times’

The World Bank said yesterday East Asia’s economies face “hard times”, revising down its 2009 growth forecast for the region to 5.3 percent from the previously estimated 7.4 percent in April. International trade will shrink next year for the first time in more than 25 years, it said.

The Bank of Canada trimmed its benchmark rate by 75 basis points this week. The European Central Bank cut its main rate by the same margin to 2.5 percent on Dec. 4, the same day the Bank of England chopped its rate by one percentage point to 2 percent.

“Economies such as South Korea’s are clearly exposed to the drying up of global export demand and together with easing inflation, it gives more room for the central bank to be aggressive,” said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.

Consumer prices rose 4.5 percent in November, the smallest gain in seven months. Inflation peaked at 5.9 percent in July.

Exports Drop

South Korea’s exports fell by the most in almost seven years last month as shipments to China, the nation’s biggest overseas market, tumbled 27.8 percent. South Korea’s jobless rate climbed 3.3 percent in November, the highest since July 2007.

“As the downturn in exports and domestic sales deepens, we expect firms to cut jobs further,” said Kwon Young Sun, an economist at Nomura International Ltd. in Hong Kong. “We expect employment to fall outright in 2009, for the first time in six years.”

Hynix Semiconductor, the world’s second-largest computer memory chipmaker, said this week it’ll eliminate 30 percent of its executives and slash labor costs by more than 15 percent.

Hyundai and other South Korean carmakers have cut production at home and abroad to cope with slowing demand. Hyundai also plans to eliminate more than 10 percent of its executive jobs, Hankook Ilbo reported.

Posco, Asia’s third-biggest steelmaker, is slashing planned output by about a third this quarter.

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

Last Updated: December 10, 2008 22:17 EST