The Bank of Korea’s Monetary Policy Committee (hereinafter referred to as the Monetary Policy Committee) lowered the base interest rate by 0.25 percentage points (p) from 3.25% per year to 3.00% per year at the monetary policy direction meeting on the 28th. Following the 0.25% point cut last month, this is the second consecutive cut.
Bank of Korea Governor Lee Chang-yong said at a press conference after the meeting that day, “As uncertainty in the growth path has increased, there is a need to further adjust the base interest rate,” and “Uncertainty in the economy and inflation has increased due to the direction of the new U.S. government’s economic policy.”
It appears that the Monetary Policy Committee judged that the pace of economic downturn could be slowed by lowering interest rates and releasing money into the market to revive domestic demand, including private consumption and investment.
In fact, the Bank of Korea lowered its growth forecasts for this year and next year by 0.2 percentage points to 2.2% and 1.9%, respectively, reflecting slowing exports, sluggish domestic demand, and the risk of the launch of the re-elected President Donald Trump administration.
The Monetary Policy Committee announced in a resolution at the monetary policy direction meeting that it judged it appropriate to further reduce the base interest rate to alleviate downside risks to the economy as downward pressure on growth increases.
Regarding the side effects of the cut that are of concern, such as exchange rate, inflation, and household debt instability, he said, “Although exchange rate volatility has expanded, the price increase rate is stabilizing and household debt is slowing,” and “We closely examine the impact on financial stability and the conflict between policy variables.” “We will decide the speed of the reduction while doing so,” he said.
At the time of the cut last month, the Bank of Korea stated that it was in no hurry to ease monetary policy, with five out of six members of the Monetary Policy Committee saying that the benchmark interest rate should be maintained at 3.25% even after three months. Uncertainty factors that threaten the Korean economy, including success, have emerged.
Accordingly, the Bank of Korea lowered next year’s growth rate to the 1% range to reflect this change in the economic environment, and the government and ruling party argue that only by lowering interest rates and reducing the interest burden will private consumption and investment revive and the situation of the self-employed and vulnerable groups improve. agreed to
Successive interest rate cuts can cause side effects such as exchange rate instability and increased household debt.
The won/dollar exchange rate began to rise following the U.S. presidential election early this month on expectations of a rise in U.S. prices and interest rates, exceeding the 1,410 won level during intraday trading on the 13th, and maintaining the 1,400 won level. If the base interest rate is further lowered, foreign investment funds will flow out in pursuit of higher rates of return, and the value of the won may fall further, solidifying the exchange rate in the 1,400 won range or rising further.
We also need to look at how household debt, which increased significantly in the third quarter but calmed down somewhat in the fourth quarter, and house prices in metropolitan areas such as Seoul will be affected by this cut.
Source: www.nextdaily.co.kr
