ed Interest rate cut

Deregulation, structural reform should accompany rate decision

The Bank of Korea cut its key interest rate to a record low Wednesday in the face of feeble recovery momentum and lingering concerns over the global economic outlook, including the weaker yen. The benchmark rate was trimmed by a quarter of a percentage point to 2 percent. It was the second rate cut this year after the central bank lowered the rate by the same margin in August following a deadly ferry disaster that dented retail sales and other consumer spending.

The 2 percent rate matches a record low last seen from February 2009 through June 2010, when the Korean economy was reeling from the global economic crisis. The central bank also lowered its economic growth forecast for this year from 3.8 percent to 3.5 percent.

The rate cut appears to be a step in the right direction, given the need to prop up the government’s expansionary fiscal actions amid the protracted economic downturn. While exports have remained solid and consumption has slightly improved, there are downside risks and concerns about external economic conditions such as sluggish growth in the eurozone. The inflation rate, as measured by consumer prices, remained in the 1 percent range for 23 consecutive months, leaving room for the central bank to cut interest rates for the second time in two months.

But it’s also true the rate cuts can trigger a host of side effects. First and foremost, skeptics say there is little to expect from the cuts since the interest rate is already low enough. This means that corporate investment has remained sluggish not because interest rates were high but because businesses are unable to locate investment destinations amid uncertain economic prospects.

Lower rates also could add fuel to the already-serious household debt problem as lower borrowing costs will encourage households to take on more debt. Another concern is that they could help accelerate capital outflows at a time when stock prices have fallen significantly of late amid clearer signs of more foreign investors deserting Korea.

Even so, the latest cut was inevitable as effects from bold pump-priming measures taken by new Finance Minister Choi Kyung-hwan have been below expectation. Property and stock markets became hot once, but have still fallen short of rejuvenating the moribund economy. A variety of economic indicators still show no indication of improvement, too.

Bank of Korea Governor Lee Ju-yeol can be lauded for making the rate cut decision bravely despite the anticipated controversy over the central bank’s independence after Choi, who doubles as deputy prime minister for economic affairs, has been drumming up support for one.

Of course, it’s difficult to expect our economy to turn around all of a sudden merely with rate cuts. What’s needed is bold deregulation that can improve corporate investment sentiment. And structural reform should be carried out to sharpen the competitiveness of Korean industries.

It’s our sincere hope that the latest rate cut will serve as an occasion to kick-start Asia’s fourth-largest economy.