Bloomberg News

Bank of America’s Lee Sees One More Rate-Cut in Korea This Year

September 04, 2012

Lee Jaewoo, chief Korea economist at Bank of America Merrill Lynch in Seoul who previously worked for the International Monetary Fund, comments on South Korea’s economic outlook. He spoke in an interview at the Grand Hyatt hotel yesterday.

On interest rates:

“Certainly, by October there will be a rate cut. There’s now a consensus that growth this year will be below 3 percent. If the central bank cuts this month, it won’t be a surprise. Subsequent rate cuts aren’t likely after this one. Although the economy is weakening, we’re not looking at a major collapse comparable to that of 2008, and no one is talking about contraction.”

The next central bank meeting is scheduled for Sept. 13.

“Monetary policy takes a long time to show effect, so a cut now seems to make sense, but not much more than that because the second half of next year will probably be a situation where a rate increase needs to be considered on inflation and economic growth regaining momentum.”

On Korea’s export outlook:

“I’m not worried that we will see a bottomless decline in exports. We are at about bottom now, whether it’s in nominal or real terms.

“The fact that the trade surplus is high gives us some comfort. As the Korean won is still a VIX sensitive currency, if the trade surplus was negative, then we would have a full-body blow to the exchange rate, raising the sense of a semi-crisis. A strong trade surplus gives a solid cushion to the foreign- exchange market.”

On Korea’s fiscal policy:

“I’m expecting, with half hope, that the budget next year will be a little more expansionary than was originally intended. The government was emphasizing a return to fiscal balance. Not that they should give up the plan, but postponing it by another year or two” would be good, he said.

“To actually do a formal supplementary budget for this year would probably be too late. If all parts of the government can come out with a bit of solid commitment on providing support to economic growth, that in itself can be a positive move in terms of boosting confidence. A clear commitment, even if it may be a level of stating principles, can be very helpful in limiting declining confidence.”

On the South Korean won:

“I doubt the current level is too strong for exports. In terms of competitiveness for export sectors, macroeconomic analysis shows the won at 1,000 per dollar is still a reasonable number. The feeling I get by talking to corporations is that an exchange rate of 1,050 still provides a fairly comfortable level. There has been genuine improvement in Korean exporters’ competitiveness.

“I don’t think we’ll see rapid appreciation in the won for quite some time with the Europe situation the way it is, shaky China growth, and U.S. unemployment above 8 percent. We’re in a bit of a fortuitous position of seeing the won not too far from where it is, providing a comfortable cushion for exporters.”

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net Paul Panckhurst at ppanckhurst@bloomberg.net


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