SOUTH Korea will maintain pro-growth policy until a sustained recovery is firmly secured, possibly beyond 2015, as an anticipated pick-up next year might only be tentative, the finance minister said yesterday.
Finance Minister Choi Kyung-hwan noted that the policy interest rate, currently just one cut away from a record low of two per cent, was not low when compared to rates in the major economies in a “new normal” environment.
He also said he was well aware of the risk that South Korea’s economy could fall into the kind of slump that Japan suffered for 15 years, adding his ministry keen to devise policy tools to overcome that risk.
Government bond futures jumped as his pledge indicated that the country’s policy interest rate could be cut further or stay low for a longer period than thought before.
“Global interest rates are incredibly low — to the point where this situation has been called a ‘new normal’. Our interest rate is nearing a record low but compared to other countries, they are very high,” Choi said.
The Bank of Korea cut its policy interest rate by 25 basis points to 2.25 per cent in August. It kept the rate unchanged at the September 12 meeting but investors and analysts saw a considerable chance of a further cut as early as next month.
The seven-day repurchase agreement rate fell as low as two per cent in early 2009 at the peak of the global financial crisis.
Since he was appointed finance minister in June, Choi has repeatedly warned of the risk that Asia’s fourth-largest economy could fall into a long, Japan-style slump and has introduced multi-billion-dollar stimulus measures.
The minister started work in July and the Bank of Korea’s rate cut in August was also widely viewed as being influenced by Choi’s demands for coordinated stimulus efforts.
The December futures on three-year treasury bonds rose as much as 0.20 points to 107.42 after Choi’s remarks yesterday, before retreating to end the session at 107.29.
“Choi’s remarks today were like adding fuel to the market where expectations were already intact for an additional rate cut,” said one bond trader at a domestic bank in Seoul.
Whether the central bank will succumb again to government pressure has to be seen as economic indicators increasingly show Asia’s fourth-largest economy is on the right track to recovery, despite a slow improvement in exports.
The Bank of Korea governor Lee Ju-yeol said earlier yesterday the effects of the bank’s interest rate policy in supporting the economy are limited, due to cyclical and structural changes. Reuters