South Korea’s government is signaling that the central bank needs to overcome its reluctance to cut interest rates, putting pressure on policymakers ahead of a decision due in one week.
Cho Won-dong, chief economic adviser to South Korean President Park Geun-hye, said on Wednesday that “it will be better” if the Bank of Korea lowers rates given that the government may need to issue bonds. He spoke in an unscheduled visit to the press room at the presidential Blue House in Seoul after a meeting with Park where finance ministry officials presented a report on a stimulus budget and policy tasks for this year.
Bond yields have fallen to record lows as Bank of Korea (BOK) Governor Kim Choong-soo, who said in February that liquidity was “abundant,” faces the new government’s push for stimulus to avert a second-half slowdown.
“This is an unprecedented push, at least since the mid-90s,” said Kong Dong-rak, a fixed-income analyst at Hanwha Investment and Securities Co in Seoul.
Central bank meeting minutes from January and February, as well as Kim’s recent comments, “show there is little intention for a cut. Everybody will know that a cut would mean losing its independence,” Kong said.
Lee Hahn-koo, floor leader of the ruling New Frontier Party, on Monday urged the central bank to consider stimulus measures such as an interest-rate cut or increasing the loan limit for small firms.
Cho’s comments were made “in theory” and were not aimed at pressuring the Bank of Korea into an interest rate cut, the president’s office said in a statement.
Park spokeswoman Lee Mi-yon confirmed Cho’s remarks after MoneyToday first reported them.
Debt sales will push bond prices down, boosting yields, and “if the market is given advance notice, then we can reduce the additional increase,” Cho said, according to the spokeswoman. “Then it will be better if the Bank of Korea further lowers the rate.”
South Korea’s consumer prices rose 1.3 percent last month from a year earlier, the slowest rate in seven months.
“The central bank has given no signal that a rate cut is imminent,” said Yoon Yeo-sam, an analyst at Daewoo Securities Co in Seoul. “It’s one of the toughest choices between policy coordination with the government and its guard against household debt along with its independence. Now the ball is in the BOK’s court.”
The central bank has kept the benchmark interest rate unchanged at 2.75 percent after a 25 basis-point cut in October. Board member Ha Sung-keun has called for a reduction since January. Another board member, whose name has not been disclosed under central bank policy, said lower borrowing costs may have limited impact on boosting the economy while creating unwanted side effects, according to the minutes of the March 14 policy meeting released on Tuesday.
South Korea’s current situation is similar to that of 2004, when the government implemented a supplementary budget, stimulated the property market and implicitly pressed the Bank of Korea to cut interest rates, said Kwon Young-sun, a Hong Kong-based economist at Nomura International Ltd.
“The rate cuts of 2004 are regarded as a policy mistake, as the lower interest rates resulted in a domestic debt overhang, which became a major structural factor for weak domestic demand,” Kwon said in a March 26 report.
There is a 40 percent chance that the central bank “might be forced to cut rates” this month, “which would likely worsen the household debt problem,” Kwon said.