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BOK chief says low interest rate only offers limited impact

The head of Korea's central bank on Wednesday expressed his apparent opposition to lowering the key interest rate too much, saying a low or negative rate may have only a limited, if not adverse, economic impact.

"We are beginning to see the adverse effects of low interest rates employed since the (2008) financial crisis, such as a drop in the profitability of financial institutes and a rise in private debts," Bank of Korea (BOK) Gov. Lee Ju-yeol said at an international financial forum in Seoul.

Bank of Korea (BOK) Gov. Lee Ju-yeol (Yonhap)
Bank of Korea (BOK) Gov. Lee Ju-yeol (Yonhap)

The top central banker noted a change in paradigm, which he said limited the effects of conventional policies.

"As low growth and low inflation have become a new normal throughout the world, limited or non-functioning of conventional economic theories and policy measures has also become a general trend," he said.

Lee's remarks come after the BOK's monetary policy board, headed by the BOK chief, has refused to further slash its policy rate for the 10th consecutive month in April, despite growing calls for a rate cut to help bolster growth in Asia's fourth-largest economy.

Korea's exports have fallen every single month since the start of 2015, while its domestic consumption, one of two major pillars of growth, also continues to remain sluggish.

In March, the country's consumer prices rose only 1 percent from a year earlier, slowing from a 1.3-percent on-year gain in the previous month.

Against such a backdrop, the BOK has slashed its outlook on consumer price inflation in 2016 to 1.2 percent from 1.4 percent forecast in January.

Still, the BOK governor refuses to further reduce the key interest rate, saying a rate cut alone can only achieve so much.

"I believe the key rate currently stands at a level that can support economic growth," he told a press briefing after the April

19 rate-setting meeting of the monetary policy board.

"As I have stressed, monetary policy alone can do only so much to support economic growth. The monetary policy board continues to firmly believe that economic growth requires financial policies, policy measures on structural reform and monetary policy," Lee added.

Lee's view on low interest rates was again reflected in a policy note, compiled by three officials from the BOK's monetary policy department and released Wednesday.

In the note, the three co-authors noted negative interest rates currently employed by various central banks, including those of Japan, Denmark and Switzerland, had only a limited impact on the real economy, let alone any significant impact on growth.

"The negative rates recently introduced by various central banks may be evaluated in that they raised a need to review monetary policies in a different perspective from the conventional view that had assumed zero-percent as the lower boundary," they said.

"However, as seen in little improvements in the eurozone economy, it is too early to determine the validity of negative policy rates for now." (Yonhap)

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