[ED] Possible rate cut

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[ED] Possible rate cut

Structural reforms needed to boost growth potential

Bank of Korea (BOK) Governor Lee Ju-yeol has hinted at lowering the key interest rate to boost the slumping economy amid falling exports and sluggish domestic demand. This means he might change his firm position against any rate cut in favor of monetary easing in the face of growing economic uncertainty.

Marking the 69th anniversary of the BOK's founding Wednesday, Lee said the central bank will take "appropriate measures" to accommodate changes in economic conditions. He stressed the need for such measures, citing two external factors: the escalating U.S.-China trade war and plunging exports of semiconductors.

His possible change of stance is seen as a positive step toward speeding up economic recovery. However, it indicates the current economic situation is much more serious than previously thought. If Washington engages in a drawn-out trade conflict with Beijing, the fallout will deal a far greater blow to South Korea whose economy is heavily dependent on the two major economies.

Lee's remarks came three days after senior presidential secretary for economic affairs Yoon Jong-won warned of looming downside risks amid mounting external uncertainties. Lee and Yoon have apparently begun to wake up to the worsening economic conditions. This could imply the Moon Jae-in administration may change its policies before it is too late.

In fact, the liberal government has focused on promoting inclusive growth through Moon's "income-led growth" policy. But this policy has invited criticism for failing to create more jobs, bring higher income to workers, boost consumption and investments and thereby raise economic growth. It has driven small businesses and the self-employed out of business due to steep hikes in the minimum wage and the shortened workweek.

Against this backdrop, the central bank has so far stuck to the position that it is against a rate reduction. The BOK ended its lower rate policy in June 2016. Then it raised the rate twice ― in November 2017 and also November 2018. The hikes were to a certain degree inevitable as the U.S. Fed continued to increase its interest rate.

The BOK has found it difficult to take any rate action because the U.S. interest rate is higher than that of Korea. However, this situation has just begun to change, as the U.S. might cut its rate or at least freeze it. Another positive sign is less inflationary pressure. So there is growing room for a rate hike to help get the sluggish economy back on track.

Now the question is when to push down the rate. Some economists predict the BOK will cut the rate in the latter half of the year ― probably October or November. Yet the timing of any rate action is crucial to producing its intended effect. So it is necessary for the central bank to take pre-emptive action.

More importantly, the Moon administration is required to enact structural reforms to boost the country's growth potential. Without these reforms, Korean businesses cannot improve their international competiveness. Nor can the country sustain its economic growth.




Structural reforms needed to boost growth potential

Bank of Korea (BOK) Governor Lee Ju-yeol has hinted at lowering the key interest rate to boost the slumping economy amid falling exports and sluggish domestic demand. This means he might change his firm position against any rate cut in favor of monetary easing in the face of growing economic uncertainty.

Marking the 69th anniversary of the BOK's founding Wednesday, Lee said the central bank will take "appropriate measures" to accommodate changes in economic conditions. He stressed the need for such measures, citing two external factors: the escalating U.S.-China trade war and plunging exports of semiconductors.

His possible change of stance is seen as a positive step toward speeding up economic recovery. However, it indicates the current economic situation is much more serious than previously thought. If Washington engages in a drawn-out trade conflict with Beijing, the fallout will deal a far greater blow to South Korea whose economy is heavily dependent on the two major economies.

Lee's remarks came three days after senior presidential secretary for economic affairs Yoon Jong-won warned of looming downside risks amid mounting external uncertainties. Lee and Yoon have apparently begun to wake up to the worsening economic conditions. This could imply the Moon Jae-in administration may change its policies before it is too late.

In fact, the liberal government has focused on promoting inclusive growth through Moon's "income-led growth" policy. But this policy has invited criticism for failing to create more jobs, bring higher income to workers, boost consumption and investments and thereby raise economic growth. It has driven small businesses and the self-employed out of business due to steep hikes in the minimum wage and the shortened workweek.

Against this backdrop, the central bank has so far stuck to the position that it is against a rate reduction. The BOK ended its lower rate policy in June 2016. Then it raised the rate twice ― in November 2017 and also November 2018. The hikes were to a certain degree inevitable as the U.S. Fed continued to increase its interest rate.

The BOK has found it difficult to take any rate action because the U.S. interest rate is higher than that of Korea. However, this situation has just begun to change, as the U.S. might cut its rate or at least freeze it. Another positive sign is less inflationary pressure. So there is growing room for a rate hike to help get the sluggish economy back on track.

Now the question is when to push down the rate. Some economists predict the BOK will cut the rate in the latter half of the year ― probably October or November. Yet the timing of any rate action is crucial to producing its intended effect. So it is necessary for the central bank to take pre-emptive action.

More importantly, the Moon administration is required to enact structural reforms to boost the country's growth potential. Without these reforms, Korean businesses cannot improve their international competiveness. Nor can the country sustain its economic growth.






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