Rate cut may be inevitable

By Yoon Ja-young

The European Central Bank (ECB)’s announcement of a big stimulus measure is expected to add pressure on the Bank of Korea (BOK) to cut its key rate to boost the domestic economy, analysts said Thursday.

Following the additional quantitative easing by the ECB, the BOK is likely to cut its key rate as early as February or March, said Im Noh-joong, an economist at I’M Investment and Securities.

“As the Euro economy enters deflation, the ECB has been expected to use additional quantitative easing. Internally, Korea is continuing to see an economic slump despite the two rate cuts in August and October last year.

Inflation is also quite low. When considering these, the expectation is high for a further cut of the key rate,” he said.

Shin Dong-jun, an economist at Hana Daetoo Securities, said the central bank will have to cut the rate due to structural reasons such as the debt problem.

“A relatively high rate enhances credit risk,” he said, pointing out that the country’s economy has gone through structural changes after the global financial crisis.

“Though Korea’s fiscal and external soundness has improved, the ratio of private sector debt has risen steeply,” he said, pointing out that the excessive debt is dampening the positive effects of the rate cut by causing sluggish demand and falling inflation.

“The rate cut will be needed not only to boost the economy but also to lessen burden of interest payments,” he said, expecting a cut in March or April.

Analysts say that the ECB’s stimulus will help the country’s stock market.

“Of course, there won’t be changes in the fundamentals following the ECB’s announcement of quantitative easing,” said Cho Byung-hyun, an analyst at Yuanta Securities.

However, he said the market will come to prefer risk thanks to the supply of abundant liquidity.

“As risk indices fall, we can expect the inflow of foreign capital, especially of European funds that have reacted sensitively to risk factors,” he said.

He explained that the expanded liquidity supply by the ECB between 2011 December and February 2012 was behind the 11 trillion won buying of Seoul shares by foreign investors.

“That made a huge contribution in pulling the KOSPI up by over 14 percent to above 2,000 points from around 1,700,” he said, adding that European funds made up a considerable part of the buying.

Park So-yeon, an analyst at Korea Investment and Securities, however, said the ECB’s quantitative easing won’t only be good news. “With the weakening of the euro, the Korean won will relatively strengthen, adding to the difficulties of exporters,” she said.

She added that the global liquidity may prefer countries like India and Indonesia to Korea among emerging markets.

Central bank governor Lee Ju-yeol, meanwhile, said the decision by the ECB could increase volatility in the financial market, pointing out that diverse regions are taking contrasting monetary policies.

“Depending on the outcome of the ECB meeting, we expect the financial market to see increasing volatility. We are preparing for this,” he said in a meeting with foreign media in Seoul, Thursday.

He said the size of the quantitative easing would matter, though the market has been taking this as granted.

Lee added that “monetary policy will focus on financial stability,” citing the increase of household debt as a major risk factor in the financial sector.