Spurring Economy
South Korea's central bank unexpectedly slashed its key interest rate by a quarter of a point to a record low of 1.75 percent on Thursday. It is reportedly to prevent the nation from falling into deflation and to support economic growth. Even at the expense of spurring household debt, which was already at 163 percent of disposable income in 2013, the Bank of Korea (BOK) announced a surprise for the market that has expected it continue its wait-and-see attitude.
Right after the decision, the Korean won fell to its lowest since July 2013, weakening 0.6 per cent to 1,132 per dollar, a fourth straight decline. It’s fallen 3.5 percent against the U.S. currency this year and depreciated 2.1 percent against the Japanese yen.
An analyst assumed that it was political reasons that played a big role in today’s cut. Yesterday, head of the ruling party Kim Moo-sung said that aggressive policies by the authorities were needed, because quantitative easing by the European Central Bank suggested that a global currency war is going on. “With bond yields below the policy rate, the market is already expecting a rate cut,” Kim added.
Governor Lee Ju-yeol of the BOK, who took the helm 11 months ago, seems to work in tandem with fiscal policymakers determined to drive Korea out of an economic rut. Today's decision indicates BoK is willing to act to spur growth despite concerns over a sharp increase in household debt, which dragged on policy unchanged a month ago.
Listening to Mr. Lee's remarks, analyst at Kyobo Securities Kwon Han-wook predicted that the central bank is appearing open to additional rate cuts depending on economic recovery and inflation, joining the global wave of easing. Nearly 20 countries, including China, India, and Australia, have lowered their policy rates this year, taking a cue from the European Central Bank's aggressive quantitative easing.
However, Park Sang-hyun, a Seoul-based economist for HI Investment & Securities Co. who correctly forecast the rate cut, said, “The BOK would’ve been worried about falling behind the pace of global easing by holding the benchmark rate unchanged.” He expected that further rate cuts will depend on economic data to be released later.