The Bank of Korea's (BOK) rate cut of 0.25 percentage points to 2 percent Wednesday will be insufficient to invigorate the sagging domestic consumption and corporate investment, analysts said.
"The government has been using almost all stimulus measures available, not only the rate cut but also expanding government spending and deregulating the real estate market. It will see some positive effect," said Lee Geun-tae, an economist at LG Economic Research Institute.
However, Lee points out that the domestic economy isn't picking up despite a rate cut in August. "Due to economic uncertainties both domestic and abroad, the economic players aren't turning to consumption or investment," he said.
"It will take time to see any effect of a rate cut. The uncertainties should be cleared, and the real estate market should continue to improve. Only then will domestic consumption pick up," he said.
Lim Jean, an economist at the Korea Institute of Finance, points out the current interest rate isn't high. In other words, it is not the reason why consumption and investment is sluggish.
However, he said that the multi directional policy mix will help people believe that it won't get worse. "They won't immediately increase consumption and investment, but they will come to have better expectations."
Im No-jung, IM Investment and Securities, says the interest rate doesn't play as much role as the government thinks. "Businesses are reluctant to invest not because they don't have money or because the interest rate is high," he said.
He said the interest rate cut is like double-edged sword for households. "It may lessen the burden on those who borrowed money, but don't forget that some make consumption from the interest they earn. When you add up the pluses and minuses, the rate cut may have little effect on consumption."
Regarding household debt which could increase further due to the rate cut, most economists say that it hasn't reached a worrisome level yet.
"Though the quantity of the debt is huge, there still aren't signs that the soundness of the financial institutions is deteriorating," Lee said.
In the long term, however, it may be a problem. "Those who need immediate cash will be borrowing more thanks to lower interest rates, but it won't increase overall spending. They may face a problem paying the money back later if the economy continues to be in bad shape," Lim said.
A further rate cut?
Some economists expect a further rate cut.
"I think there is possibility of a further rate cut if the economy doesn't pick up. This is because rate policy has less side effects compared with other policy measures," Lee said.
Im expects another rate cut in the first quarter of next year. "It is doubtful whether the economy will have picked up by then. When you look overseas, the low interest rate has become a perennial thing. It means the global economy isn't picking up."
He said that as Korea is highly dependent on overseas trade, the two rate cuts and 41 trillion won stimulus package announced by the government won't help the economy. "Moreover, inflation for September stood at mere 1.1 percent. If this continues, there is a risk of Korea falling into the low-growth, low-inflation trap like Japan."
However, Lim said the government should be careful in considering a further rate cut.
"It has reached 2 percent already. It is time to think how far we can go. Japan was in similar situation two decades ago. It continued lowering the interest rate and expanding government spending to boost the economy. The former reached zero percent and government debt snowballed," he said.
He pointed out that as an open and small economy, Korea can't lower the rate indefinitely like other developed economies. "We will face an exodus of foreign capital. Korea has only a limited number of opportunities to cut the rate."
"As the International Monetary Fund (IMF) expects, the current economic slowdown is likely to continue for long time. Instead of another rate cut, it would be better to focus on channeling the money to flow smoothly to those who need it, like SMEs. It is time to take more selective and specific measures."
He said the key lies in employment. "There should be more quality jobs to expand household income, though it won't be easy due to structural problems."