South Korea’s Choi Urges Central Bank to Back Growth Efforts

South Korea Finance Minister Choi Kyung Hwan urged the central bank to support Asia’s fourth-biggest economy, saying it’s important for monetary policy to be in “harmony” with government efforts to boost growth.

“The Bank of Korea probably shares many of our views regarding the Korean economy,” Choi, 59, said in an interview today in Cairns, Australia where he is attending a meeting of finance and central bank chiefs from Group of 20 economies. “I am sure they will come out with a wise decision on their own.”

With the economy slowing as consumer spending declines and a stronger won cuts profits for exporters, the government added fiscal stimulus this year and is poised to boost spending to a record in 2015. The central bank has cut the policy rate to the lowest in more than three years and Governor Lee Ju Yeol, who is also in Cairns, faces growing pressure to reduce borrowing costs further to support growth.

The pace of recovery in the economy has been “very slow” since a ferry disaster earlier this year, Choi said. The accident prompted consumers and businesses to cut spending in mourning.

The trend in low inflation and growth can be seen across the world, Choi said. “To stem the cycle of low growth, what we need is to have some bold policies to boost demand. South Korea is similar,” he said.

BOK Dissenter

Two months into his job, Choi has already announced an 11.7 trillion won ($11.2 billion) stimulus package, eased mortgage lending controls and outlined plans to give tax breaks for companies that boosts dividends and investments. His ministry also plans to increase spending by 20.2 trillion won in 2015 to support growth, the biggest amount since the 2009.

Bets for another rate cut by the central bank gained momentum after Governor Lee said one member dissented on the decision to hold the benchmark rate at 2.25 percent on Sept. 12 after the 25 basis point reduction last month.

Comments by Choi this week also put pressure on yields, with the rate on three-year government bonds falling to a record low after he said there is “sufficient policy room” to support growth. The nation’s economic recovery is slowing, and although interest rates are lower than before, they are still above those developed countries, Choi said.

Rate Bets

Nomura Holdings Inc. and Barclays Plc are among banks that last week abandoned calls that the BOK would stay on hold this year and now predict a cut.

“The BOK will probably lower its growth outlook next month,” said Seong Kiyong, a Hong Kong-based fixed-income strategist at Deutsche Bank AG, who also forecasts a rate cut this year.

Choi on Sept. 11 said the nation’s economic recovery is “very fragile” with consumption weak, even as the government counts on improving domestic demand and exports to achieve its growth target of 3.7 percent this year.

The finance minister flagged the risk of deflation in the South Korean economy earlier this month with inflation in 2014 below the central bank’s target range of 2.5 percent to 3.5 percent for a third year. Consumer prices rose 1.4 percent in August from a year earlier, official data showed.

Growth Outlook

The economy grew 0.5 percent in the second quarter from the previous three months, the least in almost two years, the BOK reported, as private consumption fell 0.3 percent, the most since the third quarter of 2011. The government in July cut its growth forecast for this year to 3.7 percent, citing a slower-than-expected global recovery and sluggish domestic demand after a ferry disaster in April.

The yield on the 2.75 percent notes due June 2017 declined five basis points, or 0.05 percentage point, to 2.36 percent on Sept. 16, after the comments, Korea Exchange prices show. That’s the lowest for a benchmark three-year note since Bloomberg began compiling the data in 2000. The five-year yield dropped four basis points to 2.64 percent the same day.

The three-year yield was little changed at 2.37 percent yesterday, Korea Exchange prices show.

The won gained 2.5 percent against the dollar over the past 12 months as of the close in local markets yesterday, making it the best performer among Asia’s most-traded currencies, according to prices compiled by Bloomberg. Against the yen, the won strengthened about 12 percent in the period.

G-20 Meeting

Finance ministers and central bankers gather in Australia this week as the U.S. moves toward the normalization of monetary policy and the outlook for the global economy falters.

Choi succeeded Hyun Oh Seok as finance minister and deputy prime minister for the economy on July 15. Choi is a graduate of Yonsei University in Seoul and received a Ph.D. in international economics from the University of Wisconsin. He was a former chief economist for the European Bank for Reconstruction and Development before he became an editorial writer at a South Korean newspaper. Choi was Minister of Knowledge Economy under former President Lee Myung Bak.

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