Major economies in the Asia-Pacific region are engaging in close competition to lower their currency values, which could aggravate the slowdown of Korea’s exports and put more pressure on local policymakers to consider an additional rate cut, according to analysts.
Many investment banks at home and abroad predict Korea will keep its rate untouched at the current level of 1.75 percent per annum during the Bank of Korea’s Monetary Policy Committee meeting, slated for Friday.
Analysts say could be risky for the central bank to cut the rate again amid the growing possibility of a rate hike by the U.S. Federal Bank later this year and the seriousness of household debt in Korea. However, recent monetary polices in the region are posing a dilemma for the BOK.
Some analysts have noted that several countries in the region ― China, India, Vietnam, Thailand and Australia ― are already engaging in currency wars via arbitrary depreciation.
In particular, China slashed its benchmark lending rate again by 25 basis points to 5.1 percent on Sunday, following the previous cuts last November and March.
Thailand and Australia cut their benchmark rate by 25 basis points, to 1.5 percent in late April and 2 percent in early May, respectively.
Thai policymakers cited risks from a strong Baht for the rate cut, saying that growth of the country’s GDP, exports growth and consumer prices were below market expectations. Australia, which brought its key rate to an all-time low in February, carried out a cut again three months later. China is a major trading partner of the country.
HSBC has forecast that Vietnam, Indonesia and Malaysia may follow suit in the coming months.
Like Korea, the Asia-Pacific economies are seeking to raise the price competiveness of their exports through rate cuts after undergoing a chain effect from the Chinese economic slowdown. The difficulties in the eurozone are also hampering brisk exports and domestic consumption in these countries.
For Korea, which is suffering from the won’s record strength against the yen, the competitive monetary easing in more Asian countries could further undermine export-oriented businesses.
BOK Gov. Lee Ju-yeol told reporters earlier this month that the nation could additionally slash the benchmark rate in consideration of the coming situation.
Lee, in particular, hinted that a further rate cut could be possible despite the timing of the U.S. rate hike in the near future, adding the superpower’s rate-raising speed may not be rapid.
But some analysts advise that Korea should be more prudent in its monetary policies.
An economist from Barclays was quoted by a news outlet as saying that many Korean households lack caution, and unreasonably expect the current low rate era to last for a long time.
He said unexpected external factors could deal a big blow to the Korean banking sector, pointing out the mounting loans to households.
Stressing that currency depreciation via rate cuts is not a favorable method, he advised that depreciation by promoting a portion of capital outflows — via active investment in the overseas natural resources market — was believed to be an option.
By Kim Yon-se (kys@heraldcorp.com)
