The Bank of Korea lowered its key interest rate to a record low of 1.25 percent last week in a surprise move. The first rate cut in 12 months had a point, given the need to inject vigor into the moribund economy at a time when the government is aggressively pressing ahead with corporate restructuring, which will inevitably entail layoffs.
Korea's momentum for economic growth has already been weak with production, consumption and investment all in the doldrums. In fact, first-quarter economic growth remained at 0.5 percent from the previous three months, and so the central bank had every reason to act preemptively.
However, one cannot overlook the adverse effects from the record-low interest rate.
First of all, concern about a real estate bubble is lingering. This year's official land value rose an average 5 percent across the nation from 2015. Pre-sold apartments numbered nearly 500,000 units last year, and this trend will accelerate because of the latest rate cut.
Household debt is also expected to swell as lending rates for house-backed loans will decline. As of the end of March, household debt hit an all-time high of 1,224 trillion won, and more tenants will capitalize on the lower rate to buy homes.
It's undeniable that the property market needs to remain active to a certain degree to prop up domestic consumption. But given our structural problems such as low growth, the decline of the nation's flagship industries and the rapid aging of the population, the unusual overheating of the real estate market might bring about disastrous consequences.
The limit of the positive impact from the key rate cut has also proven true. Although the central bank has eased its monetary policy repeatedly, households and corporations have been lukewarm about spending and investing, reflecting their anxieties about the overall economic outlook.
All this requires the government to take expansionary fiscal measures. The state-funded Korea Development Institute called for extra fiscal spending through a supplementary budget or by inflating next year's budget. The Organization for Economic Cooperation and Development also earlier proposed more fiscal measures.
The government's worry about deteriorating fiscal health is understandable, but now is the time for budget planners to prime the pump of the economy so that the rate cut could lead to economic recovery.
But it is also necessary for the government to proactively brace for the danger the record-low rate could bring. The government, in particular, needs to prevent property overheating in some regions from spreading nationwide.
Korea's momentum for economic growth has already been weak with production, consumption and investment all in the doldrums. In fact, first-quarter economic growth remained at 0.5 percent from the previous three months, and so the central bank had every reason to act preemptively.
However, one cannot overlook the adverse effects from the record-low interest rate.
First of all, concern about a real estate bubble is lingering. This year's official land value rose an average 5 percent across the nation from 2015. Pre-sold apartments numbered nearly 500,000 units last year, and this trend will accelerate because of the latest rate cut.
Household debt is also expected to swell as lending rates for house-backed loans will decline. As of the end of March, household debt hit an all-time high of 1,224 trillion won, and more tenants will capitalize on the lower rate to buy homes.
It's undeniable that the property market needs to remain active to a certain degree to prop up domestic consumption. But given our structural problems such as low growth, the decline of the nation's flagship industries and the rapid aging of the population, the unusual overheating of the real estate market might bring about disastrous consequences.
The limit of the positive impact from the key rate cut has also proven true. Although the central bank has eased its monetary policy repeatedly, households and corporations have been lukewarm about spending and investing, reflecting their anxieties about the overall economic outlook.
All this requires the government to take expansionary fiscal measures. The state-funded Korea Development Institute called for extra fiscal spending through a supplementary budget or by inflating next year's budget. The Organization for Economic Cooperation and Development also earlier proposed more fiscal measures.
The government's worry about deteriorating fiscal health is understandable, but now is the time for budget planners to prime the pump of the economy so that the rate cut could lead to economic recovery.
But it is also necessary for the government to proactively brace for the danger the record-low rate could bring. The government, in particular, needs to prevent property overheating in some regions from spreading nationwide.
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