Rate Cut Based on Domestic Recovery and Global Economic Slowdown
Two Monetary Policy Committee Members Advocate Rate Hold
The Monetary Policy Board members of the Bank of Korea cited the risk of economic downturn and price stability as reasons for the additional base rate cut (from 3.25% to 3.00%) decided on the 28th of last month. However, two members argued for keeping the base rate unchanged due to concerns over exchange rate instability.
According to the minutes of the Monetary Policy Direction meeting of the Monetary Policy Board held on November 28, one member who supported the rate cut stated at the time, "Contrary to surface economic indicators, the economic sentiment of agents is quite fragile, and the biggest variable, the U.S. policy stance, will act as an unfavorable factor for our economy," adding, "Domestically, the weak recovery in domestic demand and externally, the global economic slowdown require monetary policy to respond actively."
Another member said, "Inflation continues to slow in line with the forecast path, and with concerns over rising housing prices and household debt easing, the necessity to maintain the current base rate level has decreased," and added, "Since the future growth of the Korean economy is expected to be weaker than initially anticipated, it is appropriate to cut rates at this point."
Yet another member, also in favor of a rate cut, expressed concern, saying, "The export growth rate is slowing faster than expected, and the recovery in domestic demand is sluggish," and "Next year's economic growth rate is also expected to be lower than initially forecast, and uncertainties regarding the outlook have increased due to U.S. government economic policies, major countries' economies, and the flow of information technology (IT) exports."
Furthermore, they assessed, "Regarding the consumer price inflation rate, the risk of falling below the target level in the medium term has increased due to downside risks to exports and the slow recovery of domestic demand, while risks related to household debt are being managed within a predictable range."
However, one member who argued for maintaining the rate agreed on the downside risks to the economy and price stability but pointed out, "The elevated exchange rate is expected to exert upward pressure on prices," and "Since significant volatility in the won/dollar exchange rate is expected to persist for a considerable period, it is necessary to remain vigilant about related risks."
Another member also said, "The environment for considering an additional rate cut has been created," but added, "However, given the very high uncertainty in the external sector, it is difficult to predict whether a rate cut will lead to a recovery in domestic demand. When uncertainty dominates the market, businesses and households postpone investment and consumption decisions, and additional rate cuts may increase volatility in the foreign exchange market," questioning the effectiveness of a rate cut.
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