The chief of South Korea’s central bank said Saturday that Asia’s fourth-largest economy could get a boost in growth from an easing monetary policy, but concerted restructuring moves would be key to raising its growth potential.
The South Korean economy is currently facing a combination of a low growth trend and low inflation, although the central bank trimmed the policy rate by a total of 0.75 percentage point to a record low of 1.75 percent over the past seven months.
“A monetary policy is a short-term macroeconomic move which responds to an economic cycle, and in order to boost the country’s growth potential, restructuring efforts should be in place,” Lee Ju-yeol, the governor of the Bank of Korea, told reporters on the sidelines of the G-20 finance ministers in Washington.
Lee said the South Korean central bank has joined a drive by the government to help the economy grow, adding that the government also has ratcheted up efforts on its side by expanding and front-loading budget spending.
“On the fiscal and monetary sides, many efforts have been made, but that’s not enough (to raise the overall growth),” said Lee.
The BOK chief said there is mounting pressure on the central bank to additionally cut the base rate, but such a call is not desirable, as a monetary policy has a far-reaching effect and could even impact the economy as a whole.
The central bank held the rate steady at the historic low this month after cutting it by a quarter percentage point in March, confessing that previous rounds of rate cuts have failed to produce much-awaited results and underlying economic fundamentals were not as good as what it had expected.
The BOK slashed the rate by a quarter percentage point each in August and October last year.
“We have to weigh the positive and negative impacts that a monetary policy have on the economy,” Lee said.
Earlier this month, the central bank downgraded its economic growth forecast for this year to 3.1 percent from an earlier 3.4 percent estimate, citing the weaker-than-expected recovery pace of Asia’s fourth-largest economy.
It is the central bank’s second revision of the growth prediction in three months. In January, the BOK lowered its growth forecast to 3.4 percent from 3.8 percent. The South Korean economy grew 3.3 percent last year.
The central bank also sharply slashed its inflation forecast to 0.9 percent from 1.9 percent. For 2016, it projected consumer prices to rise 2.2 percent, down from an earlier forecast of 2.6 percent.
South Korea’s top economic policymaker echoed such a view, saying that the country should accelerate its move toward a restructuring.
“The mid-3 percent growth range is a good defense for us, and we have to accept the brutal truth that the stellar economic performance seen in the past will not come again,” South Korean Finance Minister Choi Kyung-hwan said in a separate meeting with reporters here.
The finance minister also spurned speculation that South Korea’s central bank would be forced to raise borrowing costs in order to prevent a sharp capital outflow from the country, given that the U.S. Federal Reserve is widely expected to start raising interest rates this year.
“The U.S. economy is enjoying its heyday, but that is not the case in South Korea,” Choi said. “South Korea could raise the policy rate in the future, but it should not be taken for granted,” he said. (Yonhap)
