South Korea Rate Policy Haunts Financial Market

Will Bank of Korea Governor Lee Ju-yeol reject mounting calls from the government for a rate cut at the monetary policy committee meeting scheduled Thursday?

This is a question that has haunted the financial market over the past several months. The finance ministry has demanded the central bank cut its key rate further to boost the sagging economy, Yonhap reported.

Analysts said that if the BoK is going to cut the rate, it should be this month, as it will be harder to cut the rate nearer December when the US Federal Reserve is expected to raise its rate.

The wide gap over the rate policy between Gov. Lee and Finance Minister Yoo Il-ho was confirmed again at the World Bank-IMF Annual Meetings in Washington that the two policymakers attended.

On Sunday, both Lee and Yoo opened fire at each other during press briefings at the annual gatherings in Washington.

In an interview with Bloomberg, Yoo said, “Theoretically, there is room to use more monetary policy easing.”

Lee said household debt should not keep the central bank from easing its monetary policy as it was “still manageable at this point” in terms of size and quality.

However, Lee also adhered to his stance where he urged the government to do its job first to boost the economy by further expanding spending.

 Limited Room to Maneuver

At a meeting with reporters, Lee said, “There is limited room to maneuver regarding the central bank’s monetary policy, but there is plenty of room for adjusting fiscal policy.”

He said the BoK has to be more prudent and cautious in making a decision, signaling that the central bank may put the key rate on hold.

“We cannot afford to conduct monetary policy as aggressively as in developed countries. The monetary easing that we have already carried out has resulted in large financial risks including household debt and real estate problems,” Lee said.

He said the current 1.25% rate is already supportive of the economy.

The country’s household debt is one of the factors that analysts say will hold the BoK from reducing the key rate.

As of June, the country’s household debt reached a record 1,257 trillion won ($113 billion). To rein in the snowballing debt, the government has been implementing various policies, but to no avail.

On Thursday, the BoK will announce its revised growth outlook. It earlier projected 2.7% economic growth for 2016 and 2.9% for 2017. The government’s forecast is 2.8% growth this year and 3% in 2017.