[EDITORIALS]Rate cut has pitfallsThe Bank of Korea has finally lowered interest rates, reversing its earlier policy. The bank has decided that the nation’s economic slowdown had become too serious for the government to look on with folded arms. But it is still in question whether the interest rate cut will be effective in boosting the economy.
The Bank of Korea said lower interest rates are needed to keep this year’s gross domestic product growth above 4 percent. The economy has been battered by the effects of severe acute respiratory syndrome, or SARS, and other problems.
The government has projected this year’s economic growth at 4 percent to 5 percent. If growth falls short of the projections, employment will also fall and other problems will rise, the central bank said. There is also a political element: the government wanted to show that it was doing something about the sluggish economy.
The effect of an interest rate cut is largest when companies want to invest but do not have enough cash. That is not the prevailing state of affairs; interest rates are already low and there is more than 300 trillion won ($250 billion) of money in the markets. The effect of this interest rate cut will only be higher investment costs as real estate prices rise and a fixed-income earners, mainly the elderly, see their incomes dwindle. If the rate cut does not help corporate investment and consumption but triggers real estate speculation and more hardship for those living on their savings, the aftermath will be gloomy.
Watch real estate prices for a clue. Inflationary pressure on consumer prices has weakened, thanks to crude oil price drops. But the real estate market is still heated. More steps to quash speculation are needed, in addition to the development of new cities, a ban on the resale of some apartment purchase rights and a hike in real estate property taxes.
And companies have to trust the government to invest. If this administration consistently sides with labor in disputes with management, corporations will find ways to make money without building new plants and creating jobs. The structural problems should be addressed before stimulus measures.