Bank Korea cuts rates to stimulate
(Here's hoping not first domino about household debt-to-income. "That is higher than the U.S. before its subprime crisis." )
The Bank of Korea joins the growing list of central banks to cut rates, as the dilemma between stoking growth and balancing high levels of debt tips in favor of the former.
On Thursday, the central bank surprised by cutting its base rate a quarter of a percentage point to a record low of 1.75%, and follows a rate cut by Thailand's central bank late yesterday. Central banks from China to India have cut rates since the beginning of this year as falling oil prices have caused deflation and slowing growth in many countries.
South Korea has faced a gloomy landscape of falling exports of electronics, automobiles and machinery. Manufacturers have been squeezed by lower-cost competitors in Taiwan and China , and the effects of a weakening yen, which have made Japan's exports more competitive. Growth isn't expected to come in much above 3% this year, for the fourth year in a row.
Amid the gloomy outlook, South Korea increasingly has relied on debt to fuel growth. But now the high debt overhang is discouraging more household spending. South Korea's household debt-to-income level stood at 144% at the end of the second quarter last year, the latest data available. That is higher than the U.S. before its subprime crisis.
That means rate cuts are likely to have only a limited impact. " Korea's already fired its bullets," said Fred Neumann , an economist with HSBC in Hong Kong . The central bank cut rates twice last year. The moves led to higher debt levels as South Koreans bough more real estate, pushing up house prices in Seoul . But overall domestic spending has remained in the doldrums, in part because of the debt overhang but also because of stagnant wages.
Eighteen of 23 economists polled by The Wall Street Journal expected the central bank to leave its base rate unchanged. The remaining five bet on a rate cut in March. Some economists say the central bank may downgrade its growth forecast in its quarterly economic outlook in April.
Write to Kwanwoo Jun at kwanwoo.jun@wsj.com
Corrections & Amplifications
This story was corrected at 0320 GMT . The original misstated the day in the second paragraph as Wednesday.
(END) Dow Jones Newswires
03-11-15 2134ET
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