BOK member expresses caution about rate cuts

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BOK member expresses caution about rate cuts

A member of the Bank of Korea’s rate-setting committee warned Wednesday that an accommodative monetary policy aimed at stimulating the economy through interest rate cuts could trigger economic instability if it fails to bring about increases in income.

“The financial uncertainties can be caused by different factors,” said Lee Il-houng, a recently-appointed member of the monetary policy committee at the central bank. “But they usually take place when accommodative monetary policy only translates into increased debt levels and fails to lead to higher income.”

His view is in line with the Bank of Korea governor, Lee Ju-yeol, who has expressed a cautious approach toward calls for an additional rate cut following a surprise cut in June. The central bank has held its benchmark rate since then.

Lee Il-houng, the board member, noted that Korea is currently beset by a combination of surging debt and stagnant income levels, a residual effect of the 2008 global financial crisis. “The high debt leads to weak domestic consumption,” he said. “The increase in debt can pose a threat to economic stability when structural solutions are absent.”

Lee also called for the need to increase savings in order to foster economic stability. “In the face of an aging society, the country has insufficient levels of accumulated savings,” he said, “so it can be assumed that the interest rate cut failed to actually boost domestic consumption because there were not enough savings.”

He went on to emphasize that the most important role of monetary policy is managing inflation.

The board member’s presentation at the Bank of Korea’s headquarters was delivered in lieu of the central bank’s monthly monetary policy meeting. Starting this year, the bank will decide on the key interest rate eight times a year instead of every month.

Lee, 59, has a B.A. in economics from the London School of Economics and Political Science and a Ph.D. in economics from the University of Warwick. Before joining the Bank of Korea board on a four-year term last June, Lee was president of the state-funded Korea Institute for International Economic Policy.

Other members appointed last year include Cho Dong-chul, who worked as a chief economist for the state-run Korea Development Institute; Koh Seung-beom, a former standing commissioner of the Financial Services Commission; and Shin In-seok, former head of the Korea Capital Market Institute.

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