Peer pressure forces BOK to cut key rate
By Choi Kyong-ae
The central bank unexpectedly cut its key interest rate to a record low of 1.75 percent, Thursday, joining other central banks in a worldwide “easing” policy.
Analysts said there could be at least one more 25 basis point cut later this year as they expect slowing economic growth and lower consumer prices to continue.
The Bank of Korea (BOK) lowered the benchmark interest rate by 25 basis points to support economic growth and prevent the country from falling into deflation. It cut the base rate by 50 basis points in two steps last year.
“We agreed to cut the rate this month as we judged economic data from the past two months didn’t support our growth and inflation forecasts for this year,” BOK Governor Lee Ju-yeol said in a press briefing.
The move was a “preemptive” measure the central bank took before it revises its economic forecasts for 2015. Declining oil prices will likely keep consumer prices low throughout the year, Lee said.
Two out of the BOK’s seven committee members voted for a rate freeze, he said.
As for the effect of the rate cuts, he said the previous two initially helped lower borrowing costs at banks. “We believe the latest rate cut will have a positive impact, though a limited one, on consumer spending and corporate investment at least in six months from now.”
When it comes to deflation and rising household debt worries, the governor said Korea is not in deflation as its economy is growing. To maintain household debt at manageable levels, the bank is closely cooperating with the authorities, he said.
Meanwhile, analysts said the surprise cut is not only the result of peer pressure from more than 20 central banks which have cut their rates in recent months, but also the outcome of continued pressure from the government.
“It’s safe to say Finance Minister Choi Kyung-hwan and Kim Moo-sung, who heads the ruling Saenuri Party, indirectly influenced today’s rate cut,” said Woori Futures currency analyst Sung Jin-ho.
This week, Choi said the pace of Korea’s growth remains weak though recovery is taking place, while Kim urged the authorities to take an aggressive step as the European Central Bank’s easing policy indicates a global currency war was underway, the analyst said.
But Governor Lee balked at the expression of a global currency war. He said the dollar rose higher against other currencies on expectations of an earlier-than-expected rate hike following robust February employment data in the U.S.
In January, the BOK revised down its economic outlook for Korea in 2015. It projected the economy to grow 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 the governor’s comments.
“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,” Lee said.