No fundamental reform, no economic rebound
Published: 01 Dec. 2024, 19:56
The Bank of Korea (BOK) last Thursday opted for a decisive policy pivoting to monetary easing with a surprising back-to-back rate cut that brings down the benchmark rate to 3 percent from 3.5 percent that was maintained until September from January 2023. The last time the central bank cut the base rate consecutively was in 2009 when the global economy was reeling from a financial meltdown. As the base borrowing rate comes down by 50 basis points, households’ debt-financing cost may ease about 6 trillion won ($4.3 billion) a year, according to the central bank.
The BOK’s turn to an aggressive rate path despite the weak currency hovering around 1,400 won to dollar and the potential negative impact on colossal household debt and a heated real estate market suggests how worried the central bank is about the economic conditions and prospects. Along with the rate cut, the BOK lowered its growth estimates for this year and next by 0.2 percentage points to 2.2 percent and 1.9 percent, respectively.
Worse is yet to come. The growth rate for 2026 is projected at 1.8 percent, suggesting that the economy’s growth mired at a slow-motion gear of under 2 percent. The economy underperformed 2 percent only six times since GDP data became available from 1954. An economy moving in the 1 percent range in non-crisis times can be alarming.
The economy-accommodative action from the central bank may be a relief for the government which has packaged a restrictive budget for next year — with its outlay growth stopping at 3.2 percent for next year. But lowered interest rates can fan volatilities in foreign exchange, household debt and real estate. The latest rate meeting by the BOK was not unanimous, with two out of six members of the Monetary Board, excluding the governor, voting for a freeze.
Yoo Sang-dae, the BOK deputy governor, was among the two dissidents, the first time the deputy joined the dissenting side since November 2004. BOK Gov. Rhee Chang-yong emphasized that Yoo’s dissent was a “personal view” as a board member. But his vote, which reflects an internal consensus, implies the conundrum of the central bank torn between its responsibilities to tend to the fragility of the economy and the snowballing household debt. The Monetary Policy Board cited an easing in inflation and household debt growth, but it must keep a close watch on their movements as well the forex market.
Governor Rhee pointed out that the rate cut cannot help exports that have turned sluggish due to waning competitiveness. He stressed the importance of industrial policy and structural reforms to buttress export competitiveness. The lasting stimuli to break the economy out of the stalemate would be precision policies and painful structural reforms.
The BOK’s turn to an aggressive rate path despite the weak currency hovering around 1,400 won to dollar and the potential negative impact on colossal household debt and a heated real estate market suggests how worried the central bank is about the economic conditions and prospects. Along with the rate cut, the BOK lowered its growth estimates for this year and next by 0.2 percentage points to 2.2 percent and 1.9 percent, respectively.
Worse is yet to come. The growth rate for 2026 is projected at 1.8 percent, suggesting that the economy’s growth mired at a slow-motion gear of under 2 percent. The economy underperformed 2 percent only six times since GDP data became available from 1954. An economy moving in the 1 percent range in non-crisis times can be alarming.
The economy-accommodative action from the central bank may be a relief for the government which has packaged a restrictive budget for next year — with its outlay growth stopping at 3.2 percent for next year. But lowered interest rates can fan volatilities in foreign exchange, household debt and real estate. The latest rate meeting by the BOK was not unanimous, with two out of six members of the Monetary Board, excluding the governor, voting for a freeze.
Yoo Sang-dae, the BOK deputy governor, was among the two dissidents, the first time the deputy joined the dissenting side since November 2004. BOK Gov. Rhee Chang-yong emphasized that Yoo’s dissent was a “personal view” as a board member. But his vote, which reflects an internal consensus, implies the conundrum of the central bank torn between its responsibilities to tend to the fragility of the economy and the snowballing household debt. The Monetary Policy Board cited an easing in inflation and household debt growth, but it must keep a close watch on their movements as well the forex market.
Governor Rhee pointed out that the rate cut cannot help exports that have turned sluggish due to waning competitiveness. He stressed the importance of industrial policy and structural reforms to buttress export competitiveness. The lasting stimuli to break the economy out of the stalemate would be precision policies and painful structural reforms.
with the Korea JoongAng Daily
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