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BOK keeps rates steady - for now

As expected by the market, the central bank maintained the key interest rate at 2.25 percent.

Now the biggest question is whether the Bank of Korea will make another adjustment in the monetary policy rate within this year.

Earlier this week, Finance Minister Choi Kyung-hwan mentioned the possibility of cutting the borrowing rate, citing slow economic growth. He suggested a single rate cut wasn’t enough to lift the economy.

“Looking at GDP growth in the second quarter, the nation’s economic recovery was significantly weak,” said Choi on Wednesday during a meeting with business journalists from Korea’s broadcasting stations. “The government is easing regulations and increasing next year’s budget. For the time being, there is a need for fiscal policy and monetary policy that would strongly support the country’s economic recovery.”

The possibility of lowering the key interest rate within this year seems to be rising, as Bank of Korea Governor Lee Ju-yeol did not reject the idea entirely.

In fact, one of the members of the Monetary Policy Committee yesterday suggested lowering the rate, according to the governor.

Although the central bank governor didn’t directly mention cutting the key interest rate, he stressed that consumer sentiment has improved after the government’s stimulus programs, including loan regulation easing and various tax revisions. But he said the corporate sector still showed a weak recovery.

“The domestic economy is showing slow improvement as people move away from their reaction to the Sewol ferry disaster,” Lee said yesterday during a press conference after a Monetary Policy Committee meeting. “But it is difficult to say that we see a vivid recovery on the corporate side.

“Thus, we decided to keep the rate at its current level after monitoring the effects of the government stimulus programs and the monetary policy changes.”

The central bank last month lowered the key interest rate for the first time since May 2013 by 0.25 percentage points from 2.5 to 2.25 percent on the request of the finance minister to support the government’s attempts to stimulate the domestic economy.

Since then, the central bank lowered its economic growth outlook for this year to 3.8 percent. However, the outlook is expected to be lowered once again as second-quarter growth turned out to be worse than expected.

In the second quarter, the economy grew 0.5 percent compared to the previous year. This was lower than an earlier projection of 0.7 percent.

In a recent survey by the JoongAng Ilbo, 60 percent of 30 economists said there was a possibility the Korean economy could enter deflation.

According to economists who participated in the survey, deflation is harder to overcome than inflation because it can sink the economy into a vicious circle of falling consumer spending, falling corporate earnings and depressed investment.

The BOK governor downplayed concerns about deflation.

“Although consumer prices have been in the 1 percent range for almost two years, that is mainly because of plummeting prices of agricultural products and international energy prices,” Lee said.

By SUNG SO-YOUNG [so@joongang.co.kr]