Short Comment
The institution announced that the policy rate became 1.25%. It had been main consensus of markets. Expectation for sluggish economic growth in the country, which IMF lowered to 2% from 2.6% and the concern for deflation could be two main reasons for the determination. Lee Ju-Yeol, Chairman of the institution, has implied that it could decrease the rate to support sluggish economic momentum in the country. He indicated that the institution could lower the rate again if the economy kept proceeding in sluggish momentum.
Despite the messages, brokerage services like J.P. Morgan or Societe Generale are suggesting that the rate will be fixed at 1.25% for a while. It means that the institution could wait for another meaningful signal on the economy like trade war between G2 destroying global supply chains. The other central banks' stance could be another grounds for the suggestions. In the real, main central banks, US Federal Reserve, Bank of Japan and European Central bank, are taking more prudent approach in making monetary policy than expected by the markets. Korea is much smaller country than the developed ones, so its central bank would need to take more careful policy. The country's dependence on external factors is much bigger than usual developed countries.
The institution announced that the policy rate became 1.25%. It had been main consensus of markets. Expectation for sluggish economic growth in the country, which IMF lowered to 2% from 2.6% and the concern for deflation could be two main reasons for the determination. Lee Ju-Yeol, Chairman of the institution, has implied that it could decrease the rate to support sluggish economic momentum in the country. He indicated that the institution could lower the rate again if the economy kept proceeding in sluggish momentum.
Despite the messages, brokerage services like J.P. Morgan or Societe Generale are suggesting that the rate will be fixed at 1.25% for a while. It means that the institution could wait for another meaningful signal on the economy like trade war between G2 destroying global supply chains. The other central banks' stance could be another grounds for the suggestions. In the real, main central banks, US Federal Reserve, Bank of Japan and European Central bank, are taking more prudent approach in making monetary policy than expected by the markets. Korea is much smaller country than the developed ones, so its central bank would need to take more careful policy. The country's dependence on external factors is much bigger than usual developed countries.
However, I cannot agree with their opinions. Korean economy has been facing meaningful momentum already, and the institution needs to take actions fast. We could take deflation as an example. Bank of Korea and the country's government have insisted that the authorities do not worry about it, but sluggish economic momentum is closely relevant with the deflation. I think they are saying in that manner because the government is believing that the worry of market participants itself could devastate economic environment of the country. In the backside, authorities are taking appropriate measures like lowering the policy rate.
Besides, behaviors of US Federal Reserve are not that prudent, unlike its messages. Jerome Powell, Chairman of US Fed, has been sending messages underlining careful approach in lowering the institution's policy rate, but it had decreased the rate twice since last July already. It also determined to provide the liquidity to the markets with participating in REPO transaction and buying US Treasury Notes having short-term maturity. I think that its policy is enough to satisfy what the participants want. Messages from Bank of Korea have been more radical than those from US Fed, meaning no burden in lowering its policy rate more fast.
Now, the participants are doubting that the country's economy could achieve the growth of 2% for this year. For next two months, central and provincial governments will use KRW200tn to offset sluggish private sector. The real recession which could start from the US has not started yet, while the government is leading the economy already in Korea. We would see 0% policy rate in Korea on latter half of next year. The government's share in the country's economy is being bigger, and the 0% interest rate will be a part of it.