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Bank of Korea doesn’t cut rates in spite of mounting pressure

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The Bank of Korea

The Bank of Korea

Surprisingly, the Bank of Korea did not decide to cut rates as it was widely expected. Neither the mounting political pressure nor increasing North Korean threats were enough to push the central bank of South Korea to change interest rates.

Decision to hold interest rates steady

On the 11th of April, the Bank of Korea informed that it did not decide to cut interest rates. The move is, certainly, surprising as the central bank of South Korea did not bow to the mounting political pressure from the government. The government believes that cuts in interest rates would significantly boost confidence which has been dented by North Korean threats.

As it was underlined in a statement issued by the Bank of Korea, the benchmark interest rate was to remain at 2.75 percent. What is interesting is the fact that most analysts had anticipated cuts in interest rates due to the mounting political pressure from the government. Yet, still some economists are convinced that the Bank of Korea would be still under pressure to reduce the benchmark interest rate as the uncertainty about the South Korea’s economy would not disappear overnight.

Indeed, the political pressure on the Bank of Korea is to continue as the government of South Korea downgraded its outlook for 2013 to 2.3 percent, compared to the December’s projection of 3 percent growth. However, the central bank has underlined that it would launch its new $2.65 billion lending program aimed at backing smaller businesses which have been suffering from worsening economic conditions, including North Korean threats and the weak yen.

Commenting on decision to hold interest rates steady, analysts note that the central bank is convinced that interest rates are, indeed, low. Analysts, moreover, point out that expected cuts in the benchmark interest rate would lead to practically taking control over the central bank by the government, giving it a real impact on decision-making process regarding future cuts in interest rates.

The Bank of Korea underlined that there was no need of cuts in the benchmark interest rate as South Korea has already entered the growth track. However, also on the 11th of April, the central bank informed that it cut its forecast for the South Korea's economy. According to the newest outlook, the country is to see a growth of 2.6 percent in 2013.

Government vs stimulus

The government of South Korea, on the other hand, is much concerned over North Korean threats and their possible impact on the country’s economy, thus President Park Geun-hye has already demanded introduction of new stimulus measures. The fact is that North Korean threats have already had an impact on the economy of South Korea which has seen consumers and companies reduce their spending as the confidence is dropping.

In addition, Finance Minister Hyun Oh-seok has countlessly repeated that the South Korea’s economy is not in the best shape, thus the authorities need to take more firm and proactive steps. Therefore all initiatives of President Park Geun-hye should not be surprising as she aims to introduce fiscal stimulus.

Just on the 10th of April, Finance Minister Hyun Oh-seok underlined that North Korean threats might lead to substantial slowdown in economic momentum. Indeed, more and more companies are not only concerned about North Korean threats which clearly have a negative impact on the South Korea’s economy, but also they are more alarmed because of the weakening yen which has already hit South Korean exporters.

The question is whether South Korea should introduce nervously new policies or it should patiently and carefully observe how the situation evolves.

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