SEOUL, Apr 3: South Korean President Park Geun-hye said on Wednesday that the government must quickly produce an extra budget to create jobs and support the working class, while a meeting of the central bank chief and Park’s senior aide fuelled bets on an interest rate cut.
‘The working class will suffer greatly if the economy continues to slump,’ Park told senior finance ministry and financial regulator officials, according to the presidential office, calling for a swift policy response.
Park’s administration is expected to unveil the details of the extra budget sometime next week in a bid to break Asia’s fourth-largest economy out of what it calls a prolonged slump. A senior finance ministry official says it would be worth between 15 trillion won and 20 trillion won ($13.42 billion-$17.89 billion).
In conjunction with the extra budget, which will be part of a broader package by the government to revive growth, news that Bank of Korea Governor Kim Choong-soo met with Park’s chief economic aide late on Tuesday fuelled speculation of a rate cut at the central bank’s policy meeting next week to further boost the stimulus efforts.
The Bank of Korea surprised markets last July by lowering rates for the first time in more than three years just days after Kim attended a meeting with officials at the presidential office.
‘The Bank of Korea will likely cut the interest rate as part of the all-out efforts (by authorities) to defend the economy,’ said Yum Sang-hoon, an economist at SK Securities.
The Park administration, which was inaugurated in late February, lowered its 2013 growth forecast to 2.3 percent in March from 3.0 percent previously as slumping external demand and the rapid depreciation of the yen have undercut local manufacturers.
A survey conducted by South Korea’s big business lobby group showed that the country’s leading manufacturers are already seeing their exports and profits undermined by the yen’s decline and want government help to counter the effects of so-called ‘Abenomics’, a round of massive monetary stimulus being pushed by Japanese Prime Minister Shinzo Abe.
Park told government officials on Wednesday to take steps that will ease troubles facing smaller companies stemming from the yen’s decline. In March, the average yen/won rate was down 15 percent from a year earlier, according to the Bank of Korea.
As the government readies its fiscal stimulus, markets have priced in expectations for a 25 basis-point rate cut by the Bank of Korea at its April 11 meeting. The central bank is also expected to lower its growth forecast for the year, which currently stands at 2.8 percent.
Such a move may erode the central bank’s credibility, especially after the governor’s meeting with the Park aide.
The central bank kept the benchmark rate unchanged at 2.75 percent for the fifth consecutive in March and has repeatedly said first-quarter economic indicators were not far off from its initial expectations.
The central bank’s March minutes, released on Tuesday, showed that only one member of the monetary policy committee voted for a rate cut and gave no hints of a radical shift in the central bank’s assessment of the economy.
(AGENCIES)
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