Lowering key rates can help S. Korea's economic growth: gov't official

SEJONG, March 2 (Yonhap) -- Lowering key interest rates further can promote growth in the South Korean economy, a finance ministry official said Monday, as fluctuating economic data is raising uncertainties about the future of the country's economy. The remark by Lee Chan-woo, head of the ministry's economic policy bureau, comes after South Korea's industrial production dropped 1.7 percent in January compared to the previous month, with specific numbers for the mining, manufacturing, gas and electricity sectors falling a sharp 3.7 percent from a month earlier. The 1.7 percent fall is the sharpest contraction in over six years. Exports and imports contracted 3.4 percent and 19.6 percent, respectively, in February from a year earlier. This triggered alarm bells in a country heavily dependent on trade to generate growth. Lee stressed that while from an academic standpoint cutting the rate is good for the economy, any decision on the matter will be made by the Bank of Korea (BOK). The central bank lowered rates twice last year to a record low 2 percent to help invigorate the economy that is estimated to have grown 3.3 percent. The latest remark by the official can be interpreted as the government wanting the BOK to lower rates one more time to jumpstart the economy, which has not recovered as quickly as previously anticipated. Lower rates can make money more available on the market, which can fuel investment, spending and growth, but it can worsen household debt problems. The director general said that any positive effects from last year's rate cut will be felt starting in the second quarter. "Usually, there is some lag time for such changes to take effect," the official commented. He said coupled with the fact that a drop in international crude oil prices will start having an impact in the second and third quarters of 2015, the government believes its growth target for this year remains achievable. The finance ministry claimed 3.8 percent growth can be achieved in 2015, although the BOK said 3.4 percent is more realistic. Despite consumer prices growing 0.8 percent on-year in January, preliminary data showed 0.5-0.6 percent growth for February, way below the annual 2 percent goal. Lee, however, added that at present it is not right to say the country is in a deflationary spiral. "The low inflation is mainly caused by supply-related developments such as the drop in crude and agricultural goods prices," the official said. He said this can be seen in the fact that while raw material imports nosedived last month, demand for consumer and capital goods moved up. Crude oil accounted for roughly 60 percent of all raw material imports. Lee said that although some have raised fears that exports may contract for this year overall, careful examination of daily shipment numbers, which do not reflect changes in working days per month brought on by holidays, shows volume going up noticeably compared to last year. The director general said the government expects economic data to start moving up once the "early year" adjustments are made during the first quarter. Related to the latest data, Kim Jung-sik, a professor of economics at Yonsei University in Seoul, said a drop in industrial output is linked to weak consumption, making it critical for the BOK to actively consider lowering the key rate once again. He added that despite 35 straight months of current account surplus, the numbers can be viewed as being brought on by a "recession" where imports fell at a faster clip than exports. Others such as Choi Sung-keun, a senior fellow at the private Hyundai Research Institute (HRI), said that while the government may be trying to put a positive spin on the matter, the pace of recovery is disappointing. "This is not a positive situation," he warned. Unlike Kim, the HRI researcher claimed that he did not think raising rates will have impact because the current dilemma is caused by people not spending money. On the plus side, he said that both consumer and business sentiment indexes are showing limited signs of improvement that could push up growth later down the road. yonngong@yna.co.kr (END)