Lowered Benchmark Rate
The Bank of Korea held a Monetary Policy Committee meeting on Oct. 15 and lowered the key rate from 2.25 percent to 2.0 percent. It had cut the key rate from 2.50 percent to 2.25 percent in August.
The benchmark rate cut to the lowest level ever is based on the determination that the recovery of the national economy is still slow, and concerns are rising regarding the eurozone. The low inflation pressure played a part as well. The rate of consumer price increase has remained below 2 percent for 23 months in a row.
At the same time, the central bank adjusted this year’s GDP growth rate downward from 3.8 percent to 3.5 percent, which is 0.2 percentage points lower than the IMF’s most recent estimate. The estimated growth rate for next year was adjusted from 4.0 percent to 3.9 percent, too. In addition, the estimated private consumption growth and capital spending were cut from 2.3 percent to 2.0 percent and from 5.7 percent to 5.2 percent, respectively.
Under the circumstances, the government is looking to put both expansionary fiscal policy and expansionary monetary policy into operation. The Ministry of Strategy and Finance welcomed the decision of the central bank, expecting that it would contribute greatly to stimulating spending and investment along with its macroeconomic policy packages worth 41 trillion won (US$38.6 billion).
Still, the extent to which the key rate cut helps raise the potential growth rate remains to be seen. In general, it takes about six months to a year for the benchmark rate cut to have a visible impact in the real economy. Also, a large number of Korean enterprises are hoarding their reserves these days due to the lack of attractive investment targets.