Central bank leaves key rate alone

While there are ongoing debates on whether the Korean central bank should take a more aggressive stance and make an additional cut in the key interest rate to prevent the already decelerating economy from entering a state of perpetual deflation, Bank of Korea Gov. Lee Ju-yeol warned against reliance solely on monetary policy.

Lee spoke during a press conference Thursday after the BOK’s monetary policy committee decided to keep the benchmark interest rate at 2 percent for the second consecutive month.

“Without solving the problem and making efforts toward structural change, it will be difficult to break the cycle of low growth and low inflation,” he said.

Citing Abenomics’ concentration on monetary policy in trying to stimulate the economy and Japan’s struggles with deflation, Lee said it is crucial to change the fundamental economic structure in Korea, including the adoption of a more flexible employment system.

“Considering how our society is aging and the problem surrounding the demographics of the labor structure, as well as the stagnant environment for investment, I believe our economic development is moving into a stage where our expectations for economic growth will have to be lowered,” said Lee.

He noted it will be inevitable for the Korean central bank to revise its economic outlook for next year.

In October the BOK lowered its projection for next year’s growth from to 3.9 percent from 4 percent.

The central bank will release its forecasts every three months starting in January.

Continuation of low growth is especially likely as private consumption has fallen this month compared to the previous month and even core inflation retreated from 2 percent to the 1 percent range. Even exports, which have maintained stable growth, have started to shrink.

“In the past two months since we lowered our outlook, huge changes have taken place,” Lee said. “There is no doubt in my mind that it will be difficult to maintain our outlook of 3.9 percent growth.”

However, Lee once again brushed off fears that the Korean economy is at risk of deflation.

“Even the KDI (Korea Development Institute) projected next year’s growth at 3.5 percent and inflation and core inflation at 1 percent,” Lee said. “One can’t say that an economy is in deflation when the economy is seeing growth in the 3 percent range and inflation is between 1 percent and 2 percent.

“I think it is excessive to argue that the central bank should be bolder because of concerns over deflation.”

Although the governor has rejected concerns that the economy is moving toward deflation and warned against reliance on another rate cut, the market has been accepting of his comments about disappointing performances despite preemptive measures taken since Choi Kyung-hwan became Finance Minister and has rallied around an aggressive economic stimulus campaign, which included interest rate cuts in August and October.

Prior to August, the last time the central bank changed its key interest rate was May 2013.

The central bank governor said monetary policy committee members unanimously agreed to keep the interest rate at 2 percent this month to monitor the effect on the economy of falling crude oil prices and other external influcences, as well as the significant increase in household debts and two rate cuts.

“The central bank sent signals that it will lower its growth and inflation outlook in January. Recoveries in consumption and facilities investment were also described as ‘inadequate,’ which supports our case that the next move by the Bank of Korea will be a 25 basis point rate cut in Q1 2015,” said Ronald Man, economist at HSBC.

BY LEE HO-JEONG [ojlee82@joongang.co.kr]