By Choi Kyong-ae
Korea's central bank will have to cut interest rates further this year if the economy proves to be weaker than anticipated, a U.S. analyst says.
On Thursday, the Bank of Korea (BOK) lowered the benchmark interest rate by 25 basis points to an all-time low of 1.75 percent to support economic growth and prevent deflation.
The cut came unexpectedly amid growing downside risks following a cut of 50 basis points in two steps last year.
"The central bank did exactly what we expected," Boston-based IHS Global Insight senior research director Sara Johnson told The Korea Times last week.
"A 25 basis point rate reduction will not make a large difference in the economic outcome, but it will help support economic growth."
The 40-year veteran in macroeconomic forecasting and economic policy analysis said that with the won strengthening against the yen, more accommodative monetary policy might help to improve the competitive balance between the currencies.
"Inflation worldwide has diminished," she said. "Effectively this means that if the bank doesn't cut interest rates, real interest rates rise.
"A rate cut won't hurt the economy and it could help the economy. Perhaps the rate reduction should be more than 25 basis points (throughout this year)."
As for concern that lower rates could increase household debt further, Johnson said, "Home purchases will depend on employment growth, income growth, expectations of future income and wealth.
"So I don't think that should be a worry. We are not seeing signs of a credit bubble."
The researcher reiterated that it was appropriate for the BOK to instigate monetary stimulus when growth was slowing.
But she dismissed worries that Korea was heading toward Japan-style deflation.
"Korea's economy is sufficiently strong to avoid sustained deflation," she said.
"In the two years from 2016 to 2017, Korea will benefit from growing import demands from the U.S. and Western Europe."
She remained cautious about China's growth, saying several factors would restrain growth there.
These included rising debt, a weak housing market and excess capacity in some basis industries.
She said a slowdown in China's growth was one of the biggest challenges this year because China was an important export market for Korea, Japan, Australia and Southeast Asian countries.
Global Insight predicts that between 2016 and 2019, Korea's economy will grow 3.5 percent, strengthening exports, and increased spending.
Global Insight expects 6.5 percent growth for China, close to 1 percent for Japan and 8 percent for India.
In January, the BOK revised down its economic outlook for Korea this year. It projected the economy to grow by 3.4 percent, down from 3.9 percent. Its inflation projection fell to 1.9 from 2.4 percent.
The bank looks set to lower the forecasts next month given recent comments from BOK Governor Lee Ju-yeol.
"The economy is not expected to recover enough to meet our growth and inflation forecasts due to declining exports, weak spending and a lack of facility investment," he said on Thursday.
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| Sara Johnson Senior research director at IHS Global Insight |
On Thursday, the Bank of Korea (BOK) lowered the benchmark interest rate by 25 basis points to an all-time low of 1.75 percent to support economic growth and prevent deflation.
The cut came unexpectedly amid growing downside risks following a cut of 50 basis points in two steps last year.
"The central bank did exactly what we expected," Boston-based IHS Global Insight senior research director Sara Johnson told The Korea Times last week.
"A 25 basis point rate reduction will not make a large difference in the economic outcome, but it will help support economic growth."
The 40-year veteran in macroeconomic forecasting and economic policy analysis said that with the won strengthening against the yen, more accommodative monetary policy might help to improve the competitive balance between the currencies.
"Inflation worldwide has diminished," she said. "Effectively this means that if the bank doesn't cut interest rates, real interest rates rise.
"A rate cut won't hurt the economy and it could help the economy. Perhaps the rate reduction should be more than 25 basis points (throughout this year)."
As for concern that lower rates could increase household debt further, Johnson said, "Home purchases will depend on employment growth, income growth, expectations of future income and wealth.
"So I don't think that should be a worry. We are not seeing signs of a credit bubble."
The researcher reiterated that it was appropriate for the BOK to instigate monetary stimulus when growth was slowing.
But she dismissed worries that Korea was heading toward Japan-style deflation.
"Korea's economy is sufficiently strong to avoid sustained deflation," she said.
"In the two years from 2016 to 2017, Korea will benefit from growing import demands from the U.S. and Western Europe."
She remained cautious about China's growth, saying several factors would restrain growth there.
These included rising debt, a weak housing market and excess capacity in some basis industries.
She said a slowdown in China's growth was one of the biggest challenges this year because China was an important export market for Korea, Japan, Australia and Southeast Asian countries.
Global Insight predicts that between 2016 and 2019, Korea's economy will grow 3.5 percent, strengthening exports, and increased spending.
Global Insight expects 6.5 percent growth for China, close to 1 percent for Japan and 8 percent for India.
In January, the BOK revised down its economic outlook for Korea this year. It projected the economy to grow by 3.4 percent, down from 3.9 percent. Its inflation projection fell to 1.9 from 2.4 percent.
The bank looks set to lower the forecasts next month given recent comments from BOK Governor Lee Ju-yeol.
"The economy is not expected to recover enough to meet our growth and inflation forecasts due to declining exports, weak spending and a lack of facility investment," he said on Thursday.
