South Korea’s government is signaling that the central bank needs to overcome its reluctance to cut interest rates, putting pressure on policy makers ahead of a decision due in one week.
Cho Won Dong, chief economic adviser to President Park Geun Hye, said yesterday that “it will be better” if the Bank of Korea lowers rates given that the government may need to issue bonds.
Bond yields have fallen to record lows as Bank of Korea 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. Greater central-bank independence from governments is associated with lower inflation, according to a 1993 paper co-written by Lawrence Summers, who later became U.S. President Barack Obama’s economic-policy director.
“This is an unprecedented push, at least since the mid- ’90s,” said Kong Dong Rak, a fixed-income analyst at Hanwha Investment & 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.”
Lee Hahn Koo, floor leader of the ruling New Frontier Party, on April 1 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 weren’t aimed at pressuring the Bank of Korea into an interest-rate cut, the president’s office said yesterday in a statement. Lee Mi Yon, a Park spokeswoman, confirmed Cho’s remarks after MoneyToday first reported them.
The Bank of Korea will cut its seven-day repurchase rate to 2.5 percent or 2.25 percent in the second quarter, according to nine out of 23 economists surveyed by Bloomberg. The benchmark yield on three-year government bonds traded at 2.47 percent yesterday, having fallen 15 basis points from a month ago. The yield, which touched a record low of 2.45 percent on March 28, has traded below the policy rate since Feb. 5.
South Korea’s consumer prices rose 1.3 percent in March 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.”
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