BOK Cautious Over Economic Recovery

Lee Seong-tae Bank of Korea chief By Kim Jae-kyoung Staff Reporter The nation's top central banker said Tuesday that the ongoing economic recession will be ``deep'' and ``long,'' indicating that Asia's fourth-largest economy will not rebound anytime soon and may undergo a U-shaped recovery. The remarks came after Bank of Korea (BOK) chief Lee Seong-tae and his six board members froze its seven-day repurchase agreement rate at the current level of 2 percent for the third consecutive month. It has slashed the key rate by a combined 3.75 percentage points since last October. ``The economy is not walking backward but it is unlikely that economic activities will turn around soon,'' Lee told reporters following the monetary policy committee meeting. ``A high degree of uncertainty is surrounding the business situation given the existence of both upside and downside risks,'' he added. ``The downside risk to economic growth is expected to persist because of the sustained global slump and sluggish job market.'' He pointed out that the outlook for the exports environment still remains bleak due to sluggish economic activities in major economies, such as the United States and Europe, while private spending and facilities investment are still in the doldrums. ``The economy has managed to avert the worst-case scenario but things are unlikely to markedly improve in the second half,'' he said. Regarding the future course of monetary policy, Lee said that the central bank will maintain an accommodative policy stance for a while. His comments suggest that the credit easing cycle is over and the central bank will not cut rates again unless unexpected external shocks take place. His view is widely shared by market analysts, who forecast neither rate cuts nor rate hikes for the rest of this year. ``I think the BOK easing cycle is over and the next move is up, probably sometime in early 2010,'' ING Group senior Asia economist Tim Condon told The Korea Times. ``But BOK has room to cut in the event of an unanticipated negative shock,'' he added. Morgan Stanley analyst Sharon Lam echoed the view, saying, ``Korea's rate cut cycle may have been completed. We believe BOK will likely keep rate unchanged at 2 percent for the rest of this year until rate hike in the first quarter of next year. ``We do not completely rule out the possibility of a double dip if developed market demand disappoints again. Nevertheless, I believe the chance of a rate hike is still low this year.'' On growing concerns over excess short-term liquidity in the market, the governor said that although there is a need to keep a close watch on the money flow, now is not the time to absorb the money given current economic conditions. Market Force Company CEO James Rooney said that the Korean economy is still under a lot of stress and it may still be necessary for BOK to retain some flexibility in case it is necessary to further stimulate the economy. ``Re-absorbing excess liquidity is something that should be done cautiously and steadily to avoid creating any new dislocations in the financial markets and to avoid putting further stress on the fragile real economy,'' he said. ``From past experience, it is quite likely that there will be further 'after-shocks' to this global crisis later on this year, so let us not be too hasty in claiming that all the problems have been solved.'' kjk@koreatimes.co.kr