Central bank under pressure to cut interest rates

The Korea Times

The Korea Times

Finance

Sun, October 1, 2023 | 14:09

Economy

Central bank under pressure to cut interest rates

Posted : 2015-03-08 17:15

Updated : 2015-03-08 21:12

Bank of Korea Governor Lee Ju-yeol speaks during a meeting with economic experts at the central bank's main office in downtown Seoul last month. The BOK is under pressure to cut its key interest rate to boost the sluggish economy. / Yonhap

By Choi Kyong-ae

A Bank of Korea rate cut is necessary as early as this month to revive exports and weakening domestic growth despite household debt, analysts said Friday.

They said the bank is expected to carry out a rate reduction in April should it holds it steady at its monthly monetary policy meeting scheduled for Thursday.

"A rate cut will likely worsen the problem of high and rising household debt. It certainly won't make it any better. But the much greater problems are weak domestic growth, a rising real effective exchange rate and serially low inflation," BNP Paribas analyst Mark Walton said in an emailed message.

These broader problems "must take precedence over the risk of fueling household debt growth." That's because the debt growth could be mitigated through separate measures such as macro-prudential restrictions on lending, the corporate and investment banking analyst said.

He said February's inflation data was only positive in year-on-year terms due to the tobacco tax hike at the beginning of this year. Last month, Korea's Consumer Price Index (CPI) inflation fell to the lowest of 0.5 percent year-on-year since 1999.

"Excluding the tobacco tax impact, this too is close to its post-Asian financial crisis low. Lower interest rates are the obvious channel through which the Bank of Korea (BOK) may be able to engineer stronger inflation, via stronger domestic demand and a weaker exchange rate," Walton said.

From January, the government increased tobacco prices by 80 percent to 4,500 won ($4) from 2,500 won. This adds 0.6 percentage points every month through year-end in CPI inflation.

His view was echoed by many other analysts who said the positive impact of a rate cut could exceed the negative side of increased household debt.

"It is impossible to kill two birds with one stone. It appears to be more urgent for Korea to cut rates to boost its sluggish economy as global central banks do," said Lee Sang-jae, an analyst at Eugene Investment & Securities. "As there seems to be no possibility of a soaring inflation in the near future, Korea needs to cut its key lending rate as an immediate measure to support growth."

To help its exporters have price competitiveness in global markets, Korea needs join other countries by cutting rates which will weaken the won, Park Sang-hyun, an analyst at HI Investment & Securities, said. January exports fell 0.7 percent to $45.2 billion from a year earlier, according to BOK data.

The BOK held the benchmark interest rate steady at a record low of 2 percent last month after two cuts last year. Korea's household debt reached a whopping 1.089 quadrillion won at the end of 2014, jumping from 1.021 quadrillion won a year earlier.

KDB Daewoo Securities analyst Yoon Yeo-sam said the two rate cuts late last year were not working as consumer sentiment remains subdued. "The government will have no other option but to use monetary easing to boost the lackluster economy for the moment."

More than 20 countries have cut their key rates in the first quarter alone of 2015 when the U.S. is expected to increase its rate in tightening policy. The collective move sent global interest rates to multiyear lows.

Most recently, India's central bank cut its rate Wednesday for the second time this year citing weakness in parts of the economy. Last week, China cut interest rates to lower borrowing costs for small businesses in a weakening economy. China's economic growth fell to 7.4 percent last year, its slowest pace in nearly 25 years. It has lowered this year's growth target to 7 percent.

Backing up the case for a rate cut, Finance Minister Choi Kyung-hwan said Thursday cuts will come with higher household debt but this is "manageable unless the debt's total value rises sharply."

The BOK's next rate decision meeting takes place on March 12. It may revise its economic forecast in April.

In January, it projected the economy to expand 3.4 percent and consumer prices to increase 1.9 percent in 2015. In October last year, the corresponding figures were 3.9 percent and 2.4 percent.

cka@koreatimes.co.kr