SEOUL (Reuters) -South Korea’s central bank governor said on Thursday “excessive” policy interest rate cuts could cause another round of price upswings in the property market and increase volatility in currency markets, although the domestic economy remains sluggish.
“If we rely too much on economic stimulus policies out of urgency, there may be greater side effects later on. For example, if we cut the base interest rate excessively, there is a high risk that it will lead to a rise in real estate prices,” Governor Rhee Chang-yong said in a speech prepared for the bank’s 75th anniversary.
His comments come after the bank flagged more rate cuts to come on the day it trimmed borrowing costs by a quarter percentage point to 2.5% on May 29, to reflect the impact of the U.S. trade tariffs and tepid domestic consumption.
The widely expected rate cut, the fourth in the current easing cycle, came as the newly elected President Lee Jae-myung geared up for major stimulus measures including this year’s second extra budget to boost growth.
Rhee’s concerns about excessively cutting interest rates also stemmed from recent currency market volatility.
“The gap between domestic and foreign interest rates may widen further as the U.S. Federal Reserve adjusts the pace of its interest rate cuts, and uncertainty surrounding the results of trade negotiations with major countries may increase, leading to increased volatility in the foreign exchange market,” Rhee said in the speech.
(Reporting by Cynthia Kim; Editing by Kim Coghill)
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