Pres. Lee’s ‘Demand’ Comment Ignites Speculation

○ Pledge to boost the economy

President Lee Myung-bak Tuesday told a Cabinet meeting, “I spoke of price stability at the previous meeting, but I think consumption has seriously weakened. I hope all relevant ministries will show more interest in preventing domestic demand from weakening too seriously. Weakening domestic demand gives more difficulty to low-income brackets.”

His comment contradicts what he said in media interviews on March 22 that price stability is more important than meeting the government’s growth target of seven percent.

A source from the presidential office said, “After in-depth discussions, presidential officials asked the president to make the comment.”

“Given recently released economic indicators, exports are robust but investment and consumption have slowed down and consumer confidence has also weakened. That’s why President Lee expressed his determination to boost the economy.”

○ Finance Ministry to expedite deregulation

Economic indicators have worsened. The Korea Development Institute announced Sunday that the economy has shown signs of slowdown. After increasing 8.6 percent last year, facility investment decreased 1.8 percent in January and 1.9 percent in February. Sales of consumer goods in February increased a mere three percent year-on-year, down from January’s growth of 4.6 percent. The consumer expectation index released by the National Statistical Office also fell below the benchmark of 100 in a year.

Against this background, the government has come up with deregulation measures earlier than expected to boost investment, based on the understanding that strong domestic demand is a necessity for economic growth.

On measures to boost consumption, a Strategy and Finance Ministry official said, “We’ll accelerate deregulation efforts to draw more investment.”

○ Pressure for interest rate cut

Aware of the neutral monetary policies of the Bank of Korea, government officials said President Lee’s comment was not intended to pressure the central bank to lower interest rates. One presidential source said, “I hope people will not only think of an interest rate cut. We’re certainly developing other effective measures. We are considering implementing drastic deregulation, thus lightening the financial burden on firms.”

The source, however, did not hide his wish for a rate cut.

The central bank is highly likely to freeze rates at its Financial Monetary Committee meeting Wednesday, but is expected to make a cut eventually.

Sohn Dong-hee, director of the bank’s bond market department, said, “Bond yields usually do not change before a Financial Monetary Committee meeting, but they changed a lot yesterday due to the president’s comment.”

Another source from the central bank said, however, “President Lee apparently made the comment since he just hoped relevant authorities would strive to prevent domestic demand from weakening too much. We don’t need to interpret his statement too broadly.”