Central banks struggling to fight recession

Economists expect BOK rate cut as early as Oct.

By Lee Kyung-min

Central banks in major economies are rushing to implement expansionary monetary policies in a collective move to pre-empt a much-dreaded recession.

The U.S. Federal Reserve lowered its benchmark short-term rate to the range of 1.75 percent to 2 percent, Sept. 18 (local time), with officials suggesting they were open to another cut before the year's end.

The cut, which is the second in just two months, is considered a move to support the U.S. economy in a time of growing uncertainty, with the drawn-out trade feud with China showing no signs of abating.

"We took this step to keep the economy strong," Fed Chairman Jerome Powell said during a press conference.

He said the Fed expects the economy to remain strong and inflation to remain around its 2 percent target.

"Generally, Fed participants think these will be achieved with modest adjustments to the federal funds rate," Powell said. "If the economy does turn down, then a more extensive series of rate cuts could be appropriate. We don't see that. We don't expect that."

Hours after the Fed move, Bank of Japan (BOJ) Governor Haruhiko Kuroda, while stopping short of following suit, said its October meeting will pay closer attention to reviewing the decline in economic growth and consumer prices.

The BOJ kept interest rates unchanged at 0.1 percent.

On Sept 12, the European Central Bank (ECB) cut its interest rate by 10 basis points to minus 0.5 percent, the first move since 2016.

As part of several easing measures, the ECB will resume bond-buying, better known as quantitative-easing (QE), less than a year after it ended this last December.

China's central bank, the People's Bank of China (PBOC), cut the amount of cash banks must hold as reserves, its third move this year.

The decision sought to shore up the flagging economy by lowering the reserve requirement ratio (RRR) to 13 percent for large banks and 11 percent for mid- to small-sized banks, bringing the level to its lowest since 2007.

It will take some for the stimulus to affect the real economy, with China's industrial production in August at a 17-year low.

Industrial production increased 4.4 percent in August from a year earlier, a further slump from the previous month when it grew 4.8 percent. The figure was also worse than market consensus, which expected 5.2 percent growth.

'Aggressive rate cut warranted'

Sohn Sung-won, a finance and economics professor at Loyola Marymount University in Los Angeles, said the Bank of Korea (BOK) should cut the interest rate more aggressively, citing a sharper-than-expected slowdown.

"Korea is one of the slowest-growing economies in the Organization for Economic Cooperation and Development (OECD) and the inflation rate is approaching zero," Sohn said. "External conditions are not favorable for a country heavily dependent on exports."

The case for a rate cut is warranted, he said, as even the Fed chairman, with better economic conditions, took out an insurance policy to make sure the U.S. economy remained on a steady course, thereby minimizing recession risks.

"In the U.S., the healthy consumer sector, supported by a strong labor market, continues to see retail sales on the upside," Sohn said. "Payroll gains have been moderating but are still good enough to support robust consumer spending.

"While the U.S. economy remains healthy for now, the global economy is losing steam. Korea's export-reliant economy, without as much robust domestic consumption, should take a more aggressive stance."

Sohn said the BOK rate cut of 25 basis points in July was to blame for the slowdown in economy.

The bank cut its key rate to 1.5 percent from 1.75 percent in July, but left it unchanged in August. The next rate cut is expected Oct. 16.

"Monetary policy works with a lag of a year or more," Sohn said. "In hindsight, the BOK should have cut the interest rate a year or more ago. By keeping the interest rate high, the central bank has contributed to the current slowing of the economy. It is high time that the Bank of Korea refocuses its attention to what is most important: the slowing economy."

Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School, echoed the sentiment.

"Korea has little choice," he said. "There are several pressures, including China's currency weakness, the trade war, recession and uncertainty. Better cut rates now than later."

Shahana Mukherjee, an economist at Moody's Analytics said the current economic setting has strengthened the case for a rate cut in October.

"Little material improvement has been made in the domestic economic situation since the last monetary policy announcement in August with continued uncertainty surrounding U.S.-China trade frictions and brewing tensions with Japan," Mukherjee said.

The economist said a rate cut is more probable in November rather than October.

"It is possible that the BOK may opt to be patient for now, as it assesses the impact of the July rate cut as it works through the economy. The BOK may want to reserve some flexibility in exercising its options once there is more clarity on U.S.-China trade relations and consequently, on the medium-term pressures on global trade, which is likely to come through following the U.S.-China trade talks scheduled in October."

Troy Stangarone, senior director of Congressional Affairs and Trade at the Korea Economic Institute, said the Korean economy needs robust fiscal stimulus given the BOK has little room to maneuver with monetary policy.

"With interest rates already near historic lows, there is little room for the BOK to continue cutting rates and monetary policy is increasingly ineffective in helping to support economic growth," he said.

"Given Korea's low levels of government debt, the government has the space to engage in an expansionary fiscal policy to support the economy."

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