Will Korea do nothing amid the intensified currency war?

The People’s Bank of China has lowered the benchmark interest rate by a quarter of a percentage point to boost the economy. It is the third interest rate cut in six months following the cuts made in November last year and February this year. Despite various economic stimulus measures, the Chinese economic growth rate in the first quarter of this year was a record low of seven percent year-on-year, the lowest level in six years. As the economy has not improved in the second quarter, the Chinese government chose to ease money indefinitely. It is expected to further lower interest rates and the reserve-requirement ratio and encourage the weak Chinese yuan by increasing budget spending. At the same time, it is likely to pump-prime the domestic economy and promote exports.

The U.S. was expected to raise interest rates in June or September this year, but is likely to resort to the weak dollar policy for the promotion of exports. If the U.S. and China, the two pillars of the global economy, join the global currency war in addition to the monetary easing by Japan and the EU, the strong won is likely to be much stronger. It is worrisome that Korean exporters will be under increased pressure at a time when the Korean economy remains sluggish except for stock markets and real estate.

The bigger concern is that Korea has few cards available in the midst of the China-driven global currency war. Korea needs to lower interest rates if it is only concerned about the currency war. However, if the benchmark interest rate is lowered further now when it is in the one percent range per annum after three interest cuts in August and October last year and March this year, the problem of household debts could pose a bigger risk.

The Bank of Korea should decide its interest rate policy in the Monetary Policy Committee on Friday after closely looking at the pros and cons of a further interest rate cut. Strategy and Finance Minister Choi Kyung-hwan said early this month, “Isn’t it right (for me) to go back to politics after doing my duty?” His implied remark that he has elections in mind was inappropriate as the head of a nation’s economy. At a time when nationalism gains power in economic policies around the world, Finance Minister Choi and Bank of Korea Governor Lee Ju-yeol who are the key men of economic and monetary policies should not forget that they should grasp the global trend and come up with measures in a speedy and effective manner.