After the government Thursday announces a package of measures to be implemented in the latter half of this year to stimulate the slowing economy, attention is now being focused on whether the central bank will cut the key base rate, which has been frozen at 2.5 percent for more than a year.
Choi Kyung-hwan, the new finance minister and deputy prime minister for economic affairs, and Bank of Korea Gov. Lee Ju-yeol appeared to be striking a cooperative tone on the matter during their first meeting early this week. A statement issued after the meeting said they shared the view that the Korean economy is facing bigger downside risks such as sluggish domestic demand, agreeing that the ministry and the central bank should agree on economic and monetary policies to ensure stable growth.
Choi told reporters that the rate policy was not discussed with Lee, noting the central bank’s “inherent right” to make a judgment on the rate. His remarks seemed intended to assuage the BOK head’s displeasure with what was seen as increased pressure from the finance minister to lower the rate.
Since taking office last week, Choi has stressed the urgency of “comprehensive” and “aggressive” measures to overcome the challenges confronting the Korean economy. The central bank governor said that after the meeting with Choi, there was little difference between their views on the current economic situation, suggesting the possibility of a rate cut.
The BOK’s monetary policy committee, which decided on July 10 to freeze the base rate at 2.5 percent for a 14th straight month, is scheduled to hold its next monthly meeting on Aug. 14.
As experts argued, a decision to cut the rate is overdue but necessary.
A slowing economic recovery led the central bank recently to reduce its growth outlook for this year to 3.8 percent from 4 percent. A rate cut is also unlikely to increase the upward inflationary pressure to a risky level as the consumer price hike has stayed in the 1 percent range for nine consecutive months and has run below the central bank’s target band of 2.5 percent to 3.5 percent.
Most important, fiscal and monetary policies should be synchronized to maximize their effects at a time when all possible means should be mobilized to reinvigorate the economy.