SEOUL - SOUTH Korea's central bank reaffirmed on Sunday that it would put the top priority on its interest rate policy to help boost the faltering economy and improve fund flows through the local financial system.

The Bank of Korea offered the pledge in its 2009 policy statement, which contained key remarks and reports that it and its governor have made recently on various occasions.

'The base rate will be managed with the aim of aggressively coping with a possible deterioration of the economic conditions in case the financial instability deepens,' it said, echoing recent remarks by its governor, Mr Lee Seong Tae.

Investors and analysts bet the Bank of Korea will cut rates further in the coming months, including at its next policy meeting on Jan 9, as the local economy was facing its toughest patch in a decade.

The central bank forecast last month South Korea's economy would grow only 2 per cent in 2009, which would be the slowest growth since 1998, when the economy shrank about 7 per cent in the aftermath of the Asian financial crisis.

The Bank of Korea also said it was working toward joining a government-proposed 20 trillion won (S$22.2 billion) fund to recapitalise commercial banks, whose capital ratios are feared to worsen due to an expected rise in corporate failures.

Data showed on Friday South Korean exports and imports in December shrank more than expected over a year earlier as a slump in global and domestic economies have prompted consumers and companies around the world to slash spending. -- REUTERS