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Debate over effect of rate cut heats up

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Published : 2014-08-18 20:38
Updated : 2014-08-18 20:49

Debate over whether a lower interest rate will help or winder for the economy is heating up, following the Bank of Korea’s first rate cut in 15 months last week.

The Financial Supervisory Service, South Korea's financial regulator, said Monday that a lower base rate would reduce the burden on households and corporations trying to pay back their bank loans, contrary to growing market concerns that it could further worsen their finances.

The FSS data showed that the central bank’s benchmark rate cut to 2.25 percent last week is estimated to lower households’ annual interest payments on loans by 900 billion won ($884 million).

It is also expected to help reduce small and medium enterprises’ interest payments by 700 billion won, and those of conglomerates by 200 billion won, the FSS said, based on data of their floating rate loans as of last March.

The FSS said the rate reduction would also decrease the country’s unemployment and bankruptcy rates, which in turn would reduce banks’ bad loans over the long term.

Opponents, however, have been raising concerns that the Finance Ministry’s deregulation of its loan extension policy coupled with the Bank of Korea’s rate decrease will only fuel household debts, which have been growing at an alarming pace and have exceeded 1,000 trillion won. The BOK said that the nation’s household debt reached 1,024.8 trillion won in March this year.

Korea’s debt rate in relation to household disposable income stands at over 160 percent, among the highest for OECD economies.

Central bank Gov. Lee Ju-yeol turned dovish after meeting Finance Minister Choi Kyung-hwan, who immediately implemented stimulus and deregulation measures to revive consumer sentiment hurt by the Sewol sinking.

The BOK, which recently revised its growth outlook for this year from 4 percent to 3.8 percent, said low consumption posed a downside risk to the economy.

By Park Hyong-ki (hkp@heraldcorp.com)

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