South Korea finance minister, central bank chief cite risks to growth

SEOUL Sun Jul 20, 2014 10:20pm EDT

Lee Ju-yeol (C), 61, a nominee for central bank governor, answers reporters' questions as he is surrounded by medias after a news conference in Seoul March 3, 2014.  REUTERS/Kim Hong-Ji

Lee Ju-yeol (C), 61, a nominee for central bank governor, answers reporters' questions as he is surrounded by medias after a news conference in Seoul March 3, 2014.

Credit: Reuters/Kim Hong-Ji

SEOUL (Reuters) - South Korea's top two economic policy officials agreed on Monday that downside risks to growth were increasing but did not say whether they saw the economy as weak enough to warrant an interest rate cut.

Finance Minister Choi Kyung-hwan and Bank of Korea Governor Lee Ju-yeol also agreed to pursue "harmony between economic and monetary policies", the two organisations said in a joint statement after their first meeting since Choi took office last week.

Choi's remarks last week calling for stimulus efforts to bolster Asia's fourth-largest economy sparked speculation among investors that the government wants the central bank to lower interest rates.

Choi told reporters on Monday there was no discussion on interest rates and that rate policy is the purview the central bank. The central bank has in the past been perceived by some in the market to have yielded to government pressure to ease rates.

Choi and other senior government officials have not said explicitly whether they want the Bank of Korea to lower rates although bond prices have risen recently following remarks by both Choi and Lee citing economic weakness.

The 1-year treasury bond yield ended at 2.455 percent on Thursday, the lowest close since June 5, 2009, and below the central bank's benchmark interest rate of 2.50 percent. It rebounded on Friday to 2.459 percent.

The finance ministry is due to announce later this week measures to support growth in the economy, which Choi said last week would fall more than 0.2 percentage points short of the ministry's earlier projection of 3.9 percent.

Some analysts, including Nomura's economist Young Sun Kwon, expect an interest rate cut as early as next month. Others, including ING economist Tim Condon, have said they expect no change in the rate.

The Bank of Korea last cut its policy interest rate, by 25 basis points to 2.50 percent, in May 2013, a move seen by some analysts and investors to have been made under government pressure for a cut.

The central bank next reviews rate policy on Aug. 14.

Domestic demand in South Korea has been hit hard by the April ferry sinking in which more than 300 passengers died. Softer growth in some parts of the world has also been a drag on confidence in export-reliant South Korea.

(Reporting by Christine Kim; Writing by Choonsik Yoo; Editing by Kim Coghill)

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