Bank of Korea Told by Former Policy Maker to Resist Rate Cut

The Bank of Korea should resist any further political pressure for an interest-rate cut after keeping the benchmark on hold this month, according to a former colleague of Governor Kim Choong Soo.

“The current level is still accommodative enough,” Choi Do Soung, 60, who served as a monetary policy committee member in 2008-2012, said in an interview in Seoul this week. Lowering the benchmark could add risks in an economy that “relies too much on debt,” he said, citing household borrowing.

A report tomorrow may show Asia’s fourth-largest economy grew 0.7 percent in the first quarter from the previous three months, picking up from a 0.3 percent increase in the final three months of 2012, according to a Bloomberg News survey of analysts. Vice Finance Minister Choo Kyung Ho has told lawmakers that fiscal stimulus aimed at boosting the pace would be more effective if aided by monetary policy.

“Monetary policy makers have to look into the future, up to, say, three to six quarters ahead,” Choi, who’s now a university professor, said. “You make a forecast, visualize it, and see the effect that the monetary policy decision you make today is going to have six quarters down the road. Otherwise, you’re going to amplify the volatility of the business cycle, rather than stabilizing it.”

Inflation expectations are “high” and the nation needs stable management of household debt, Governor Kim said in a lecture in Chuncheon, northeast of Seoul, today. He said this month that the central bank is cautious about additional easing because two rate cuts last year were preemptive. The key rate is at 2.75 percent.

Fiscal Stimulus

South Korea’s government rolled out a $15 billion extra budget this month including some stimulus measures as a weak yen adds risks for the nation’s exporters. The benchmark Kospi stocks index is down about 3 percent this year.

Choi, who’s a professor of international finance at Handong Global University in Pohang, took part in 49 rate decisions, and recalls one as the most memorable. Emerging from a Sunday church service in October 2008, he found he’d missed several calls from then Governor Lee Seong Tae. What followed the next day was an emergency meeting and a 75-basis-point cut.

He now says that the central bank should resist political and market pressures for a reduction. Choi says policy makers need to be alert to the risk of future overheating and inflation, with the BOK seeing a growth pick-up in the second half of this year on an improved global economy.

Government Signals

Cho Won Dong, chief economic adviser to President Park Geun Hye, said before the April 11 decision that “it will be better” if the central bank cuts interest rates. Finance Minister Hyun Oh Seok in his March 22 inaugural speech vowed to use “all possible policy measures” to boost an economy that has expanded less than 1 percent for seven consecutive quarters, starting in April-June of 2011.

On Japan’s monetary easing and efforts to spur growth, Choi said, “I hope Abenomics succeeds rather than fails as there is no viable alternative. He added: ‘‘At the same time, I hope that Abenomics does not cause too many troubles to neighboring countries including Korea.’’

Japan’s weakening yen is a bigger threat to the South Korean economy than risks from North Korea, Finance Minister Hyun said in an interview ahead of a meeting of Group of 20 finance chiefs in Washington.

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