Beijing and Seoul are scrambling to stimulate their slowing economies with competitive interest-rate cuts.
The latest move to combat economic jitters came Thursday when the central bank in global economic-bellwether South Korea made a surprise interest-rate cut of a quarter percentage point, bringing its benchmark rate to 3%. It was the first cut since the financial crisis in 2009. Weaker demand from abroad has made consumers more skittish and businesses less willing to make long term bets.
“Exports to our major trading partners such as China, the U.S. and European countries remain sluggish. Korean companies’ investments in facilities also have declined,” said Bank of Korea Gov. Kim Choong-soo.
In a signal that businesses are cutting back on investment, growth in imports to South Korea of big-ticket capital goods that outfit factories and infrastructure projects has turned negative the past few months. A similar trend has played out in other manufacturing powerhouses Taiwan and China.
On Friday, China’s second-quarter gross domestic product showed growth in the country slowing to its lowest rate since the global financial crisis.
Some analysts predict future quick cuts, but long-term inflation is still a concern. Even more worrying than the broad trend is a tendency to a zero-sum battle betwen economies.
Analysts said South Korea’s first rate cut in three years was a pre-emptive move designed to keep it ahead of China. Seoul fears it could become uncompetitive if it allows high interest rates to drive up the price of its currency and make exports more expensive.
The impact on South Korean households could be painful.
Lower interest could increase household loans and aggravate the debt problem. The BOK predicted household loans would increase by around 0.5 percent due to the latest cut. That means the staggering amount of household debts, which totaled W910 trillion at the end of March this year, would rise by another W4.5 trillion (US$1=W1,152). It could make it tougher to control consumer prices.
And, Dr. Doom says, “#2”.
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