Meeting raises speculation of cut in policy rate

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Meeting raises speculation of cut in policy rate

Speculation grew over a policy rate cut on Friday as the nation’s two top policy makers held private discussions while the aftershocks of China’s financial crisis continue to threaten the Korean economy.

The biggest question lingering in the Korean stock market is whether Finance Minister Choi Kyung-hwan will request another easing of monetary policy from Bank of Korea Governor Lee Ju-yeol, as it is evident that the economy is decelerating quickly while growth in China, the country’s biggest trade partner, is also cooling quickly.

A similar request was made by the finance minister when they met for the first time in July 2014 when Choi took the helm as the nation’s top economic policy maker. The meeting led to an immediate policy rate cut by the central bank the following month.

The two met for a second time in September 2014 in Sydney, Australia, when they were attending the G20 finance ministers and central bank governors’ conference. After the G20 meeting the Korean central bank shaved off another 0.25 percentage point on the policy rate; bringing it down to 2 percent.

Since then, the central bank has made two more additional rate cuts; one in March followed by another in June to lower the rate to an all-time record low of 1.5 percent.

The situation that the Korean economy is facing in the second half seems to be a repeat of a year earlier.

The economy ?? which appeared to have been making a recovery since the government and the central bank pursued aggressive economic expansionary measures including policy rate cuts ?? took a negative turn in June with the outbreak of Middle East respiratory syndrome.

The economy, which reported a quarterly growth of 0.8 percent in the first three months of this year, nosedived to 0.3 percent in the following April-June period.

In July the economy seemed to be normalizing, until the China crisis hit Korea and the rest of the world.

The jitters from China’s tumbling markets now raise the question of whether the Korean economy could achieve the 2.8 percent growth projected by the central bank let alone the 3 percent target set by the Ministry of Strategy and Finance.

In fact, Moody’s recently joined other financial institutions in lowering its growth outlook for Korea to 2.5 percent from its previous projection of 2 percent.

Some analysts say the problem is that the government is looking at the situation in the wrong direction.

“The biggest contributors to the slowing of Korea’s economy is struggling exports that started from the beginning of this year and expanding with each passing month,” said Jeong Yong-taek, an IBK analyst.

He said the problem was not due to sluggish consumer spending caused by Middle East respiratory syndrome and that recent government moves to temporary spur people to open their wallets by lowering the so-called “individual consumption tax” on expensive and nonnecessary products like automobiles, premium electronic goods and scented candles is not the ultimate solution.

“The fact that [the government] is looking at the economic flow in the wrong direction means that their countermeasure is not appropriate,” Jeong added.

“What the government should be focused on is not temporary measures like adjusting the individual consumption tax but rather [they should] start by finding solutions to boost struggling exports.

“We are at a point where we have to take actions on [export goods] price competitiveness such as lowering the key rate or depreciate our currency value.”

Although both the finance ministry and the central bank said in a press statement that the latest meeting was meaningful, they tried to downplay the significance behind it, stressing it is nothing more than a friendly gathering to improve relations between the two institutions.

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