by Yoo Seungki
SEOUL, Aug. 24 (Xinhua) -- A rate cut was reproduced in South Korea again by political pressures as the Bank of Korea (BOK) Act does not guarantee the central bank's neutral decision enough to free from pro-growth finance ministers.
The bank cut policy rates by a quarter percentage point to 2.25 percent at the August monetary policy meeting was the first fall in 15 months. It was widely expected, but some worried the decision came from what the critics said was political considerations.
BOK Governor Lee Ju-yeol, who took office in April, said a month later that the policy rate at 2.5 percent is a level of supporting economic recovery. He said it would be hard to see the rate going down given the growth outlook of 4 percent in 2014 and 4.2 percent in 2015, which are above the potential. Later, Lee explained the remark had not been a signal of rate hikes.
After the Finance Ministry's downward revision of its growth outlook, the BOK followed in the ministry's footsteps in July by lowering earlier outlooks by 0.2 percentage points, before cutting rates in August. Lee said at the press conference after the Aug. 14 policy meeting that the rate cut was to boost "economic agents' sentiment," echoing comments by Finance Minister Choi Kyung-hwan.
"The BOK is blindly following the path of Minister Choi's dangerous gambling," Rep. Hong Jong-haak of the main opposition party said in a press release right after the rate-setting meeting. "The rate cut has no difference from Choi's economic policy that dismisses the resolution of structural problems and focus only on short-term stimulus."
Choi announced a 41 trillion won (40 billion U.S. dollars) stimulus package in July when he took office, vowing to maintain an expansionary policy stance until the general public feels the effect of higher income and wealth.
The package included easing regulations on mortgage loans, a shift from the ministry's stance just four months ago of reducing the household debt-to-income ratio by 5 percentage points till 2017. The ratio was at 161 percent in 2013.
The shift came as private consumption weakened after the deadly ferry disaster. The ferry Sewol capsized on April 16, leaving more than 300 people, mostly high school students, dead or missing. Consumers refrained from travel and entertainment as deep grief swept over the entire country.
The country's real GDP growth slowed to an annualized rate of 2. 4 percent in the second quarter from 3.8 percent in the first quarter, but it was widely expected to pick up in the second half due to stimulus measures and robust exports.
"There are views that the rate cut was unjustifiable given no change in the BOK's growth outlook of 3.8 percent in 2014 and 4 percent in 2015," said Park Hyun-min, a fixed-income strategist at Shinhan Investment Corp.
The rate cut was feared to boost the already-massive household debt along with the loosening of regulations on mortgage financing. "In the longer-term, we are concerned with the potential for the debt overhang to trap the Korean economy in a vicious cycle," said Kwon Young-sun, a senior economist at Nomura in Hong Kong.
The vicious cycle referred to lower interest rates encouraging financially distressed corporate and households to take more new loans, increasing debt-service burden for the distressed and the BOK keeping the policy rate low to support the highly leveraged economy.