Bullets Intact, Overshooting Prevented, BOK Does Its Job

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Giving Credit Where Credit is Due
Those who have read this blog in the past know this fact: the Seoul Gyopo Guide is no apologist for the Korean government. However, you should make no mistake, the Bank of Korea deserves an A PLUS for its behavior and prudence under the strangest confluence of internal and external factors influencing its economy, and therefore, the Korean people. I repeat: the Bank of Korea has had the right, the obligation, to maintain its wait-and-see approach with respect to interest rates. Today, surprisingly, the Bank of Korea moved, and reduced interest rates by 25 basis points, from 3.25% to 3.00%.

The Element of Surprise Used Effectively
Some people believe that “transparency” is important in governmental policy. NOT SO for central banks. The element of surprise is an important ingredient, and should be used very selectively. In this case, the Bank of Korea has moved, and the press will express that it was a surprise move. However, readers of this blog know that there have been a large number of crosswinds that the Bank of Korea has fully known, and was actively monitoring. Those crosswinds have increased in strength, both externally and internally.

Global Inflation Fears Abated, China Risk
The price of oil has declined by almost 20% since the 12-month high. Price increases as a result, have slowed noticeably. This is also the case in almost all nations around the globe. Rampant inflation is almost never a phrase used to describe the global economy. In addition to the problems in Europe, fear exists that China’s economy is growing at a much, much slower rate than expected by many. A few moments ago, Australia’s unemployment statistics were reported to be much worse than expected. Australia is usually linked with China because China is a large buyer of natural resources from Australia. That, in turn, has supported the Korean economy since China is a large buyer of Korean-made final products. Now, that entire cycle may reverse itself. Given this, inflation has declined. As such, lower inflation has allowed the Bank of Korea to refocus on the weak internal demand that stubbornly persists in Korea.

Real Estate is a HUGE Problem
Earlier posts have stated that Koreans use far too much of their household net worth on real estate. The leasing system means that large amounts of money are inaccessible to make purchases. As a result, everyday Koreans cannot spend lavishly (no, Dogok-dong and Chungdamn-dong do not count). The problem with this is that Koreans understand that the leasing system hurts both the owners and the renters. Owners are now stuck with real estate whose value has PLUMMETED. It can only really be called a crash. In Gangnam, prices are dropping by unheard of prices absent a shock event. There is no demand, and no fix. Lower interest rates are, in theory, positively correlated with higher housing prices. For many in Korea, and I suspect the Bank of Korea is included in this, there is the hope that lower interest rates will help support housing prices. If not, and if inflation rates stay low, then it is entirely possible that lower interest rates will be in order in the medium term.



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