[fn Editorial] Bank of Korea's Rate Cut, Overcoming Crisis with Fiscal Policy

The Bank of Korea lowered the base interest rate by 0.25 percentage points to 2.50% per annum on the 29th. This is the fourth cut in seven months since October last year. This year's economic growth forecast was also lowered by 0.7 percentage points to 0.8% in just three months. It is practically halved, similar to the level during the global financial crisis in 2009. This is because all the driving forces of our economy have weakened due to the prolonged slump in exports caused by the U.S. tariff bomb and the construction and domestic demand slump.

This year, there will be a slight recovery from the negative growth (-0.2%) in the first quarter or a similar level of stagnation will continue. This also means that the Bank of Korea is likely to lower rates several more times this year. Lee Chang-yong, Governor of the Bank of Korea, said, "If the growth rate falls below 0.8%, there is a high possibility of further rate cuts."

It is difficult to endure without lowering the interest rate. In the first quarter, we fell into negative growth, and exports to the U.S. and China decreased by more than 4%. The government's economic stimulus policy is virtually at a standstill due to political turmoil and an early presidential election. Even the handling of the first supplementary budget (extra budget) of 13.8 trillion won has been delayed, and the execution effect will be seen around the second half of the year.

Although various conditions had to be considered, the rate cut was also delayed. Inflation, which has been holding back rate cuts, has stabilized at around 2%, and the exchange rate has recovered to the 1,300 to 1,400 won range, similar to pre-martial law levels. The real estate market has also seen a slight decline in price increases due to recent tightening of loan and transaction approval regulations. However, as a result, it has become a belated cut after falling into negative growth. The economic situation has worsened. Households with spending power have closed their wallets, and companies are hesitant to invest and hire. Exports to the U.S., one of the two major export markets, fell by 14.6% from the 1st to the 20th of this month. Real consumer spending in the first quarter decreased by the largest margin in over four years.

We need to break through the bottom of 0% growth this year and rise to 1% next year and further to 2%. If we do not escape the 0% trap by at least next year, low growth could become entrenched. Due to structural reasons such as super-aging, lack of growth engines, and political instability, we are heading towards a Japanese-style long-term recession. We must resolve everything so that the deeply recessed domestic demand, frozen consumer sentiment, uncertain corporate investment and exports, and weakening core industries operate properly. This is the first thing the next government must do.

The public has experienced and knows the precedent that "when a progressive regime comes in, house prices soar." The released funds could drive up house prices and spread the 'fear of missing out' (FOMO) sentiment, leading to a resurgence of 'all-in' and 'debt investment'. Household debt, approaching 2,000 trillion won, could break all-time highs. This is why consistent implementation of loan regulations and housing supply expansion policies is necessary.

To achieve the economic stimulus effect, the released funds must be used in conjunction with the government's fiscal policy. The next government is announcing a second supplementary budget of 20 to 30 trillion won. Active fiscal policy is crucial to revive the worst domestic demand and inject vitality into the economy. However, we cannot ignore the fiscal deficit exceeding 100 trillion won and the national debt approaching 1,300 trillion won.

The money that the current generation has lavishly shared will eventually return as debt to future generations. To enhance the effectiveness of policies, funds must flow to where they are truly needed. We need to focus on expanding growth engines, supporting export-strong companies, developing power and grid infrastructure, and expanding national infrastructure. We must find creative policies that revive domestic demand while promoting production and consumption.