Rate Cuts and Low Growth: Han Eun’s Double Challenge

The Bank of Korea’s Monetary Policy Committee lowered the base interest rate by 0.25 percentage points from 3.25% to 3.00%. Last month, monetary policy guidance was changed with an interest rate cut for the first time in three years and two months, with two cuts in a row. It has been 15 years and 9 months since 2009 that interest rates have been lowered consecutively. This time, it was a surprise cut that ended the market’s expectation that interest rates would be frozen. The Bank of Korea left out the phrase ‘cautiously’ regarding the pace of interest rate cuts in its decision on monetary policy guidance, leaving room for further cuts.

The reason why the Bank of Korea increased the pace of interest rate cuts is because it believed that the internal and external environment surrounding the Korean economy was so bad. As domestic demand continued to slow, the economic growth rate in the third quarter sank to 0.1% compared to the previous quarter, and even exports, which were counted, turned negative in terms of volume in the third quarter . The Bank of Korea analyzed that the export slowdown was not temporary but was due to structural factors such as increasing export competition from rival countries. Changes in the trade environment after the second Trump administration was launched in the United States are also increasing uncertainty and downside risks for the Korean economy. Although high exchange rates, household debt, and house prices remain unstable, a response to the economic downturn is now being considered.

In particular, the Bank of Korea warned that there is a high risk of low growth being established as economic fundamentals weaken. The Bank of Korea lowered its economic growth forecast for this year from 2.4% to 2.2%, and expected 1.9% for next year and 1.8% for the year after that. This is lower than the potential growth rate of the Korean economy (2.0%). From 1954 until the previous administration, the annual growth rate was below 2% only five times, including the foreign exchange crisis, but if the Bank of Korea predicts, this is the third time since last year and the current administration only.

From now on, the government’s response is important. The Bank of Korea estimated that next year’s growth rate will increase by 0.07 percentage points through this interest rate cut, but it is clear that an escape from low growth is far from possible. -only. There is a need for structural reforms that could increase growth rates and business policies that fundamentally strengthen export competitiveness. In order to restore domestic demand and revive the economy, we must have a sense of urgency and take proactive measures. This is impossible with the current state of powerlessness, to the point where the term ‘vegetarian government’ is used.