U.N. agency advises BOK to keep key rate

South Korea’s central bank should keep the key rate unchanged and turn to alternative means of injecting liquidity in the near future, a U.N. economic institution reported Thursday.

In its Economic and Social Survey of Asia and the Pacific 2015, the U.N. Economic and Social Commission for Asia and the Pacific warned that further rate cuts by the Bank of Korea may be difficult to execute due to the already high level of household debt.

“The central bank may have to consider alternative means of injecting liquidity in the near future if economic activity remains sluggish and the widening output gap pushes prices down further,” the report said.

The U.N. ESCAP annual report was released a day before the BOK’s key rate announcement, scheduled for Friday.

The Bank of Korea already cut rates twice in 2014 and once again in 2015, pushing the benchmark rate to a historic low of 1.75 percent.

The key rate cut came after South Korean inflation in 2014 dipped to 1.3 percent, significantly below the target range of 2 percent, sending shockwaves nationwide that the country may be heading toward deflation.

The report noted that the Sewol ferry disaster in April 2014 notably weakened consumer spending, the anemic property markets as well as a large drop in public infrastructure investment in the second half of last year, contributing to slowing overall investment growth.

It also called for vigorous reforms among the Asia-Pacific economies, estimating the region’s economic growth to only slightly improve to 5.9 percent this year from 5.8 percent in 2014.

In particular, the agency pointed out that merchandise exports, on which the Korean economy depends heavily to sustain growth, expanded only 2.1 percent in 2014, less than half of 4.5 percent in 2013. It therefore called on the country to come up with innovative strategies for boosting domestic demand, saying “The era of export performance feeding into consumption appears to be coming to an end.”

U.N. ESCAP executive secretary, Dr. Shamshad Akhtar, said “Many countries in the Asia-Pacific suffer from significant disparities across gender, urban and rural sectors, and income levels, despite the remarkable success in reducing poverty in the region over the past two decades.” He stressed that the Asia-Pacific countries should strive to achieve inclusive growth, which encompasses the economic, social and environmental aspects of development.

“To enhance well-being, countries need to go beyond just focusing on ‘inequality of income’ and instead promote ‘equality of opportunities,’” he added.

By Chung Joo-won (joowonc@heraldcorp.com)