Lee suggests interest rate will stay

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Lee suggests interest rate will stay

Bank of Korea Governor Lee Ju-yeol has hinted at another interest rate freeze, saying that Korea needs to be careful about adjusting monetary policy and prepare for uncertainties.

Lee’s comment comes while the ruling party and the central government are calling for further loosening of monetary policy to add strength to the weakening growth. The International Monetary Fund and other private institutions have lowered their growth outlook for Korea to the mid-4 percent range, which contrasts the Finance Ministry’s 3.1 percent growth target.

Speaking in Washington D.C., on Friday, at the annual meetings of finance ministers and central bank governors of the G-20 nations, Lee hinted that the Korean central bank is highly likely to keep its benchmark interest rate at 1.5 percent at the upcoming monetary policy committee meeting slated for Tuesday.

“There is a need to save monetary and fiscal room in response to uncertain overseas economic conditions, since the Korean economy is an open economy that is highly dependent on unexpected external shocks,” the governor said.

If the BOK keeps the rate unchanged on Tuesday, it is the ninth consecutive month the rate has remained unchanged since June 2015.

However, the governor strongly suggested that the central bank would lower its growth forecast at the meeting.

“Because the first quarter performance wasn’t good, there is a high possibility of cutting the growth forecast,” he said.

The BOK announced a 3 percent growth forecast in January. Other foreign and domestic institutions, however, released lower projections than the BOK. The International Monetary Fund cut Korea’s growth potential to 2.7 percent last week.

Lee said the low interest rate allows consumers to add to their savings rather than spending.

“In the past, people spent more by borrowing money at lower costs, but currently, such low borrowing rates … result in higher savings,” he said.

Such remarks reflect the governor’s negative view on a rate cut, a growing call from the market.

Because of recent export falls and sluggish domestic demand despite the government’s policy efforts, there are rising calls for an interest rate cut to give the economy a shot in the arm.

From January through March, the country’s exports stood at $116 billion, down about 13 percent from the same period last year. Consumer and business sentiment on the economy slightly improved in March compared to earlier this year, but the improvement in the economic indexes hasn’t turned out to be true in the real economy.

Lee stepped back from calls for a Korean version of quantitative easing, which was broached as a major campaign pledge of the ruling Saenuri Party that lost its majority in the April 13 general election.

“From my understanding, the main idea [of Korean quantitative easing] would demand that the central bank take the lead in solving household debt and corporate restructuring issues,” he said. “But my judgment is that it is not the time for the BOK to do so.”

BY SONG SU-HYUN [song.suhyun@joongang.co.kr]
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