BOK, government in sync

In sync with the government’s stimulus actions to prop up the sagging economy, the Bank of Korea lowered the key interest rate for the first time in 15 months on Thursday. The central bank cut its policy rate by a quarter of a percentage point to 2.25 percent, the lowest level since July 2010, when the country was still recovering from the shock wave of the 2008 financial crisis. The first cut in 15 months suggests that the central bank shares the government’s view that the economic state has worsened. Bank of Korea Governor Lee Ju-yeol last month hinted at the possibility of the central bank’s taking preemptive easing action, warning that downside risks to the economy were increasing.

It is rare that the independent central bank and government agree on synchronized actions to stimulate the economy. Deputy prime minister for the economy, Choi Kyung-hwan, who has been eager to employ all possible means to revive the economy since he was appointed in June, publicly asked the central bank to cooperate with the government’s policy direction. Lee and Choi met last month and told reporters they share the same view on the state of the economy. Since July, the market has been getting ready for a rate cut. The three-year government bond yield fell to 2.5 percent recently from 2.8 percent last month. The policy action was in line with market expectations.

There are always two sides to a monetary policy. Easing can help boost liquidity and stimulate demand, but at the same time can increase the already-large household debt. The governor also worried that lower interest rates could spur households to borrow more.

Loose liquidity cannot aid demand more than a year. But the cost of debt financing can go higher and at a faster speed. According to an internal study by the Bank of Korea, lowered interest rates on top of easing in mortgage loan regulations could fan household debt, which would further weigh on consumer spending. It deemed that a rate cut would only end up worsening debt levels more than reviving consumer spending. Since the authorities are well aware of the side effects, they must come up with buffer measures to pilot a soft landing in household debt.

The ball is in the government’s court now. Fiscal and monetary stimulus actions have been fired off. We cannot afford to have them wasted. With new ammunition, the government must do all it can to fuel the economy and drive it safely out of the slump. There is not much time, since the United States is poised to raise interest rates next year.

JoongAng Ilbo, Aug. 15, Page 30