By Kim Jae-won
The Bank of Korea’s reducing its key rate to a record low 1.75 percent, Thursday, will be insufficient to boost consumption and investment, analysts said Monday.
The government has spared no efforts to boost sluggish domestic demand with a stimulus package worth tens of trillions of won, along with pressure on the central bank to cut its policy rate.
However, analysts said rate reductions alone will not substantially boost frozen consumer sentiment due to stalled income growth, record-high household debt and other structural impediments.
“I think the rate cut will have a limited impact on private consumption,” said Kim Seung-hyun, a senior economist at Daishin Securities. “It will affect the real estate market to some extent, but won’t be enough to increase private consumption as a whole.”
Kim said that two previous rate cuts last year ― in August and October ― have also failed to give any considerable boost to domestic demand.
Analysts said individual consumption and corporate investment sentiment remains weak due to such fundamental factors as a tight job market and high costs to educate children, which cannot be addressed in the short run.
As consumers have gloomy perspectives on the economy, they save money, cutting on consumption. According to data from Statistics Korea, an average household set apart 27.1 percent of its disposable income last year, from 26.6 percent a year ago. The figure is the highest in 10 years.
Kim, 48, an insurance sales agent, often visits a noodle shop at Namdaemun Market in downtown Seoul to have lunch for 1,000 won (90 cents).
“I regularly go there to save costs, though the taste is not so good,” he said, asking not to be fully named.
Kim is not alone. Consumers are reluctant to spend money as they have little confidence that household economies will rebound in the near future.
Economists say that consumers are tightening their purse strings because they worry about life after retirement, job security and educational expenses for children.
“Korea lacks preparations for life after retirement, compared to advanced countries which have pushed for reaching mandatory incomes after retirement,” said Kang Seong-ho, a researcher at Korea Insurance Research Institute, in his report.
Some analysts expect the central bank to carry out another rate cut to 1.5 percent by the end of the June.
Sara Johnson, Boston-based HIS Global Insight senior research director, said, “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.”
Analysts called for the government to deregulate further and take other follow-up steps to boost consumption and investment.
Still, they said a tight job market, companies’ reluctance to increase wages and high costs to educate children will continue to restrict consumption.
People in their 30s and 40s cut their consumption to set aside money for private education for their children, while those in their 50s and 60s worry on life after retirement and youngsters in their 20s are more concerned on landing secure and quality jobs.
According to data from Statistics Korea, an average household spent 239,000 won per month on a student in 2013, up 1.3 percent from a year ago. A student refers to someone attends an elementary, middle or high school.