South Korea Government Adds Pressure on BOK to Cut Rate

South Korea’s government is signaling that the central bank needs to overcome its reluctance to cut interest rates, putting pressure on policy makers ahead of a decision due in one week.

Cho Won Dong, chief economic adviser to President Park Geun Hye, said yesterday that “it will be better” if the Bank of Korea lowers rates given that the government may need to issue bonds. He spoke in an unscheduled visit to the press room at the presidential Blue House in Seoul after a meeting with Park where Finance Ministry officials presented a report on a stimulus budget and policy tasks for 2013.

Bond yields have fallen to record lows as Bank of Korea Governor Kim Choong Soo, who said in February that liquidity was “abundant,” faces the new government’s push for stimulus to avert a second-half slowdown. Greater central-bank independence from governments is associated with lower inflation, according to a 1993 paper co-written by Lawrence Summers, who later became U.S. President Barack Obama’s economic-policy director.

“This is an unprecedented push, at least since the mid- ’90s,” said Kong Dong Rak, a fixed-income analyst at Hanwha Investment & Securities Co. in Seoul. Central bank meeting minutes from January and February, as well as Kim’s recent comments, “show there is little intention for a cut. Everybody will know that a cut would mean losing its independence.”

Consider Measures

Central banks from India to Thailand are coming under pressure for more easing. The Bank of Thailand held its benchmark rate at 2.75 percent yesterday even after the Finance Minister repeated his call for lower borrowing costs.

Earlier today, the Bank of Japan under its new governor, Haruhiko Kuroda, announced a plan to purchase 7 trillion yen ($73 billion) of bonds a month along with more risk assets as it pushes for 2 percent inflation in two years.

Lee Hahn Koo, floor leader of the ruling New Frontier Party, on April 1 urged the central bank to consider stimulus measures such as an interest-rate cut or increasing the loan limit for small firms.

Cho’s comments were made “in theory” and weren’t aimed at pressuring the Bank of Korea into an interest-rate cut, the president’s office said yesterday in a statement. Lee Mi Yon, a Park spokeswoman, confirmed Cho’s remarks after MoneyToday first reported them.

Prices Down

Debt sales will push bond prices down, boosting yields, and “if the market is given advance notice then we can reduce the additional increase,” Cho said, according to the spokeswoman. “Then it will be better if the Bank of Korea further lowers the rate.”

The Bank of Korea will cut its seven-day repurchase rate to 2.5 percent or 2.25 percent in the second quarter, according to nine out of 23 economists surveyed by Bloomberg. The benchmark yield on three-year government bonds traded at 2.47 percent yesterday, having fallen 15 basis points from a month ago. The yield, which touched a record low of 2.45 percent on March 28, has traded below the policy rate since Feb. 5.

The Central Bank is in a two-week blackout period ahead of the April 11 meeting and officials weren’t available to comment today. In a report today, the central bank said a sharp depreciation of the yen may hurt Korean exporters as relative gains in the won erode competitiveness.

Inflation Rate

South Korea’s consumer prices rose 1.3 percent in March from a year earlier, the slowest rate in seven months.

“The central bank has given no signal that a rate cut is imminent,” said Yoon Yeo Sam, an analyst at Daewoo Securities Co. in Seoul. “It’s one of the toughest choices between policy coordination with the government and its guard against household debt along with its independence. Now the ball is in the BOK’s court.”

The central bank has kept the benchmark interest rate unchanged at 2.75 percent after a 25 basis-point cut in October. Board member Ha Sung Keun has called for a reduction since January. Another board member, whose name hasn’t been disclosed under central bank policy, said lower borrowing costs may have limited impact on boosting the economy while creating unwanted side effects, according to the minutes of the March 14 policy meeting released on April 2.

South Korea’s current situation is similar to that of 2004, when the government implemented a supplementary budget, stimulated the property market and implicitly pressed the Bank of Korea to cut interest rates, said Kwon Young Sun, a Hong Kong-based economist at Nomura International Ltd.

“The rate cuts of 2004 are regarded as a policy mistake, as the lower interest rates resulted in a domestic debt overhang, which became a major structural factor for weak domestic demand,” Kwon said in a March 26 report. There’s a 40 percent chance that the central bank “might be forced to cut rates” this month, “which would likely worsen the household debt problem.”

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