More Government Spending Planned to Stimulate Economy


By Kim Yon-se
Staff Reporter

The central bank’s decision on Thursday to cut its key rate by 0.25 percentage point to 3.5 percent is designed to revive the faltering economy but analysts warn the reduction might fan inflationary pressure and slow the inflow of foreign capital.

The surprise rate cut is widely regarded as a harbinger of the government’s intention to stimulate moribund domestic demand.

Finance-Economy Minister Lee Hun-jai indicated more government spending as well as easing of tight rules on construction and investment would be utilized to boost the economy.

As part of steps to boost the moral of CEOs, President Roh Moo-hyun on Thursday visited the Hyundai Motor plant in Ulsan.

The rate cut jolted the bond market yesterday, pushing down the bond yield to a record low of less than 4 percent, thus making bond prices expensives.

The ruling Uri Party last week proposed more spending by the government to stimulate the economy even at the risk of a budget deficit of as much as 10 trillion won.

For the first time in 13 months, the Monetary Policy Committee of the Bank of Korea (BOK) on Thursday cut its basic interest rate, the overnight call rate, by 25 basis points. This will help corporate and individual borrowers save 2.5 trillion won per year in interest costs, according to BOK Governor Park Seung.

Park expects sluggish private consumption will recover following the cut of the overnight call rate, which is the interest rate the central bank charges other banks for overnight loans.

Governor Park predicted the rise in international oil prices would make the nation’s GDP growth slide down by 0.1 percentage point to 5.1 percent this year.

Though Park is still confident of growth of around 5 percent for 2004, he showed concern for next year’s growth. ``The interest rate cut is aimed at achieving growth at the 5 percent level again in 2005. But the greatest concern is oil.’’

The rate cut comes a few days after the U.S. Federal Reserve Board hiked its federal fund rate by 25 basis points to 1.5 percent.

kys@koreatimes.co.kr