BOK and finance minster fail to see eye to eye

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BOK and finance minster fail to see eye to eye

As the global economy is expected to remain weak for the remainder of this year and next, economic ministers of major economies including Korea have agreed to work together to boost global trade on the last day of the International Monetary Fund and World Bank meeting, held in Washington, D.C., on Saturday.

“Global economic growth remains sluggish in 2016, with only a modest pick-up expected in 2017,” the IMF said in a communique released Saturday. “Demand has remained soft despite highly simulative monetary policies, foreign direct investment to developing countries has decreased, commodity exporters are adjusting to declines in exports and wider geopolitical and economic uncertainties are weighing on confidence. We call on the World Bank Group and the IMF to work jointly with countries to enhance synergy among monetary, fiscal and structural reform policies, stimulate growth, create jobs and strengthen the gains from multilateralism for all.”

Although the IMF has kept this year and next year’s outlook the same as its projection in July at 3.1 percent for 2016 and 3.4 percent next year, it has lowered the growth outlook for the United States from the previous 2.2 percent to 1.6 percent. It’s outlook for Korea remained unchanged at 2.7 percent for this year and 3 percent for next year.

Korea, which has a relatively high dependency on global trade, is faced with its own problems as unexpected downward risks, including concern over the U.S. interest rate hikes, the spending contraction caused by the antigraft law and ongoing labor strikes are threatening the possibility of securing a 2.8 percent economic growth or even the 3 percent expansion next year.

The Bank of Korea later this week plans to readjust this year and next year’s growth projection, which some think tanks, such as LG Economic Research Institute, have brought to as low as 2.2 percent. But there has been a drift between Korea’s leading economist and the central bank governor regarding the tools needed to keep economic growth from falling.

Deputy Prime Minister and Minister of Strategy and Finance Yoo Il-ho hinted at the need for another cut on the nation’s key interest rate.

Yoo told Bloomberg while attending the conference in Washington, D.C., that there is still room to lower the key interest rates adding that the cut on key interest rate will not have a devastating effect on the household debt situation as they are “manageable.”

But the Korean central bank governor, Lee Ju-yeol, has disagreed. Earlier this week Lee acknowledged that there is still room for a rate cut, but he has argued that monetary policy alone cannot help the economy from recovering and stressed the need for fiscal policies.

His comment has sent signals to the market that the Korean central bank may keep the key interest rate at 1.25 percent for this month.

Governor Lee also has been drawing attention to rapidly rising household debt, especially in recent months, as the property markets that have mostly remained lukewarm since the global crisis of late 2008 have finally been picking up, particularly with the reconstruction and redevelopment projects in Seoul and nearby cities.

In fact, the country’s household debt, including credit card spending, has reached a new height in the first half, amounting to 1.257 trillion won ($1.13 billion). There is speculation that this figure will likely exceed 1.3 trillion won by the end of the year.

“Not only is the size of debt huge but the rate at which it is expanding is fast,” Governor Lee said earlier this month. “This is an issue that shouldn’t be taken lightly.” He added that what concerns him most is that half these bank loans are not used to invest in people’s futures but on daily necessities.

The BOK recent study showed that cutting the key interest rate 0.25 percentage points will raise the nation’s economic growth an additional 0.05 percentage points for that year and 0.02 percentage points the following year.

But Governor Lee has remained cautious, as there has been speculation that the U.S. Federal Reserve may raise the interest rate this year, which could lead to an exodus of foreign investments, especially if Korea’s already low key interest rate is further cut.

Despite concerns, Finance Minister Yoo remained optimistic about a 2.8 percent growth this year and more than 3 percent expansion next year since the nation’s exports have been improving while global trade volume has increased thanks to rising crude prices. Korea’s export figures in August rose compared to the previous year for the first time in 19 months.

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