Bank of Korea’s Cho Sees Room for Easing If Economy Worsens

Updated on
  • Cho sees economy’s potential growth rate on a downward track
  • Central bank’s 2017 GDP, CPI forecasts are realistic, says Cho

The Bank of Korea has room to cut record-low interest rates even further if the outlook for growth or inflation deteriorates, said board member Cho Dong-chul, while also underscoring strong confidence in the central bank’s latest forecasts.  

Cho, in his first interview since joining the board in April 2016, said he’s concerned about the downward trajectory of the economy’s potential growth rate. He estimates it to be "mid-2 percent, or the upper half of 2 percent," versus about 3 percent projected by the BOK in 2015.

Cho Dong-chul

Photographer: Jean Chung/Bloomberg

Cho believes the government needs to be careful about spending given the costs it will face as the population ages, but expressed concern that the current fiscal plan for 2017 looks "contractionary." Some lawmakers have called for a supplementary budget after the government’s fiscal plan showed spending would increase by less than 1 percent this year.

While he was careful to avoid straying into the scandal that has brought down President Park Geun-hye and put the leaders of the nation’s biggest businesses in the crosshairs of prosecutors, Cho said Korea would benefit from more transparency in governance of the chaebol. He also stressed the need for reforms in the labor and capital markets to bolster productivity, but acknowledged political difficulties in making changes.

Read more: full report on Korea’s benchmark rate and BOK forecasts

Asked whether the BOK could cut its 1.25 percent benchmark lower, Cho said: “In principle there is room, especially in Korea, which seems to be a country having a sufficient buffer among advanced economies in terms of monetary policy.”

A bigger-than-expected downturn in economic growth or inflation, or a slide in the housing market along with easing of household debt problems, could give the central bank room to consider a cut, Cho said, adding that a hike could also be possible if the economic climate changes.

He said that the central bank’s 2.5 percent growth and 1.8 percent inflation forecasts for this year are in line with his personal thoughts.

Cho, 55, is a graduate of Seoul National University and has a Ph.D. in economics from University of Wisconsin, Madison. Prior to joining the BOK board on a four-year term, Cho was chief economist for state-run Korea Development institute, where he earned the reputation of being a “dove.”

“I think I had that reputation of a dove by the market for the past 2-3 years because I was concerned more about low inflation,” Cho said. He said he considers himself neutral and that "if inflation goes above the target, I may be more hawkish than other people."

Cho said he sees the possibility of headline inflation reaching the 2 percent target some time this year, but that he isn’t too worried about price gains going too far because core inflation -- which reflects sustainable inflation pressure -- should remain below 2 percent.

Trump, China

Cho noted uncertainties flowing from the election of Donald Trump and said any increase in trade protectionism could harm Korea a lot over the long term, but wouldn’t be immediate. Less likely but more immediate and disruptive over a shorter time frame would be a financial shock from China, he said.

As to whether Korea’s key rate can go lower at a time when the Federal Reserve is heading in the opposite direction, Cho said the U.S. policy does not “mechanically imply something” about Korea’s monetary policy.

“There is no one-to-one relationship between U.S. monetary policy and Korea’s,” Cho said. U.S. monetary policy is important because it affects Korea’s economic outlook, as do many other factors, he said.

Federal Reserve Chair Janet Yellen said Wednesday that the U.S. economy is “close” to the central bank’s objectives of full employment and stable prices and she’s confident it will continue to improve. She said the the timing of the next interest-rate increase “will depend on how the economy actually evolves over coming months.”

South Korea’s won weakened and bond yields rose on Thursday, reflecting a dollar rally and Treasuries plunge overnight on Yellen’s comments.

Household Debt

Cho also noted that Korea has a large current-account surplus and an improving external position, which reduce the risk of any drastic capital outflow, or a liquidity crisis in the foreign-exchange market. He said he is more concerned about the risk of household debt ballooning to a level that could threaten the financial system.

Low borrowing costs and the easing of property rules by the government have pushed Korea’s household debt to a record 1,296 trillion won ($1.1 trillion) as of end-September.

“I believe household debt has not reached the level at which we should worry about a full-scale financial crisis possibility,” Cho said. “Still, the level of debt is a little too high and rapidly increasing."

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