尹 Impeachment Says "We Should Cut Interest Rates in January Despite Rising Exchange Rate"

■ Broadcast: YTN Radio FM 94.5 (09:00-10:00)
■ Host: Reporter Cho Tae-hyun
■ Air date: January 14, 2025 (Tuesday)
■ Talk: Professor of Economics at Inha University, Chun So-ra

* The text below may differ from the actual broadcast content, so please check the broadcast for more accurate information.
◇ Cho Tae-hyun: It's time to learn economic stories that will definitely help you to know, one step ahead of others. It's time to reveal the heaven. We have Professor Chun So-ra of Inha University's Department of Economics in the studio. Please come in.

◆Cheon-Sora: Hello.

◇Jo Tae-hyun: There will be a very difficult, difficult, and important event this Thursday. The Monetary Policy Committee's monetary policy direction meeting will be held for the first time this year, but let me ask here first. How do you view it?

◆Cheon-Sora: The view is very difficult. Still, I think there will be weight on the lower end.

◇ Cho Tae-hyun: Assuming that you gave full power to the professor, do you think the professor should cut the price this time?

◆Cheon-Sora: Of course, there is a reason for the freeze, but in a way, the economy could be a psychological battle with the current forecasts being lowered one after another. So we usually have a rate-setting meeting eight times a year, and it's four times in the first half of the year. When I think about those things, I think that January and February, so even if it's not necessarily January, I think we should cut it at least once in January and February.

◇ Cho Tae-hyun: Then I think we need to look at why we should cut it, but as you said, there is always a reason to freeze it and a reason to cut it, but there are always both sides. Which side did you focus on this time?

◆Cheon-Sora: I think there will be an exchange rate issue among the opinions that are saying why we need to freeze it now. The exchange rate will continue to go up and down from KRW 1,450 to maintain that level, or it will go up to KRW 1,500. These prospects are also coming out. In addition, there seems to be a concern that such things as financial market instability and prices may have issues in terms of exchange rate stability. If we think about domestic demand, when we talked about this last year, household debt was an issue, but we've heard a lot about it, but in terms of domestic demand, retail sales have continued to decline for almost 11 consecutive quarters. And usually, interest rate cuts began in the second half of last year, and commodity prices respond first when interest rates are maintained or high interest rates are high. However, things that we don't have to buy interest rates and demand for sensitive home appliances react.

◇ Cho Tae-hyun: Just use your phone for another year.

◆Cheon-Sora: Yes, let's put up with it. There will be a move like this to delay the purchase period, but this is a situation that is decreasing in all directions. And in addition to this, any political issues that have recently emerged have stimulated the psychology. As a result, various indicators that influence domestic demand, such as consumer sentiment and corporate sentiment, have deteriorated considerably. So now, the Bank of Korea has made an economic forecast in November and usually makes an additional forecast in February, but it is predicting that it will be lowered to a revision.

◇ Cho Tae-hyun: That's why it seems more likely to lower the benchmark interest rate. Therefore, considering the exchange rate and other factors, it is necessary to freeze the value of the won, but considering the overall domestic demand situation, the focus is on the reduction. Then, how bad is the domestic demand index now?

◆Cheon-Sora: First of all, when looking at the consumer retail sales index last year by the National Statistical Office, It decreased by 2.1% compared to the same period last year.

◇ Cho Tae-hyun: What is the retail sales index?

◆Cheon-Sora: When we measure consumption, there are a number of indicators, so what we're calculating from GDP to GDP is the amount that household players consume, which is the amount that the private sector or the government uses. But since such things are announced quarterly, the National Statistical Office counts retail sales every month. So how many companies and self-employed businesses have really sold, sales are someone's expenditure, so we can look at consumption in that way instead.

◇ Cho Tae-hyun: It's truly domestic demand.

◆Cheon-Sora: Yes, so if you look at these things, you can see that various domestic demand is not good, and these things are revealed in the data on the surface.

◇ Cho Tae-hyun: You said it decreased by 2.1% until November, but it's likely that domestic sentiment and other things have worsened in December, so if you count it up to that point, it could decrease even more. Then why do you think people don't spend so much money?

◆Cheon-Sora: First of all, I think we should look at it separately if we can give you a reason why consumption is so bad. Structurally, there are issues that we don't have money to spend right now. mid- to long-term That's why my income hasn't improved. In other words, disposable income, interest expenses, and after paying various basic pensions, there is not enough money to spend, but these are not really short-term issues. Because it's a combination of my job and some future decisions, there are those things and expectations for the future can work. When I look at the future, the situation will improve, interest rates will go down, prices will go down, so I think it's okay to use it now. If the future is very uncertain and the economy is not good, I may close my wallet thinking that I should save it now due to preliminary demand. These can be thought of as mid- to long-term decision making, and in the short-term, the current consumer sentiment can work, but there are actually some areas where various factors that can influence psychology, both internally and externally, are working badly.

◇ Cho Tae-hyun: There's Yoon Suk Yeol and Trump.

◆Cheon-Sora: There's a combination of all those external and internal things, and interest rates have been cut twice in both October and November, but there's been an event in political December enough to offset these things. So even those that have acted as factors that dampen psychology can act in a way that we should save a little bit rather than increase current consumption.

◇ Cho Tae-hyun: Is there any impact on the exchange rate?

◆Cheon-Sora: There are actually two directions for this. It's called Seohak ants right now. Because they invest a lot like this, some people are now investing in foreign assets at a high rate of return, but if the exchange rate rises, for example, when purchasing imported products, it can lead to an increase in prices. This is a time lag, but there is a possibility that oil prices and raw material prices will increase one after another. Then you might think that even if the exchange rate right now did not affect prices now, prices could rise in a few months. Of course, the overall consumer price index is now at 2%, but things like eating out prices are actually close to 3%. They can also change the way people behave. Consumption behavior may change such as packing lunch boxes at home instead of eating out or making meal kits at home.

◇ Cho Tae-hyun: That's right. These days, I've been doing a lot of things in the kitchen that I often eat outside. So, there may be foreign investment income, but I think we need to consider these things a lot because the proportion of imported goods will be much greater than that. However, if you think about the exchange rate, there is a possibility that the exchange rate will rise further if the interest rate is lowered. Isn't this a dilemma?

◆Cheon-Sora: Yes, that's right. When we talk about the movement or direction of the exchange rate, we always put a precondition on it because there are so many factors that can affect the exchange rate. If the U.S. freezes interest rates when all other conditions are constant, and only Korea cuts interest rates, and all other conditions are constant, there is a possibility that some money will be withdrawn from Korea due to the difference in interest rates. the outflow of capital And cutting interest rates in Korea may cause the value of the Korean won to fall because you might think that the Korean won will be supplied more globally. But it's not always like that. People are concerned about the possibility, for example, that the growth rate is already being lowered and the governor of the Bank of Korea has made remarks suggesting the need to cut interest rates to some extent, which may have already affected the price of the exchange rate by people's expectations that there may be a rate cut in the future. In such a situation, even if interest rates are cut, there is a possibility that the exchange rate will not change significantly.

◇ Cho Tae-hyun: Well, I think that's why it's more difficult because it's not this simple to move. Another variable to look at, we can't be free from US interest rate decisions. But if you look at it now, there is an extreme prospect that the U.S. will not cut interest rates within this year. If so, isn't it more burdensome for us?

◆Cheon-Sora: Of course, it would be nice if monetary policy could be carried out independently, but in some small, open economy, you can't be completely independent of U.S. interest rate decisions. And if we anticipate that the U.S. will continue to cut interest rates as we expected, we're kind of already low, so there's a possibility that we're going to do it more independently, whether we freeze or cut the gap. However, if there are many indicators to be announced in the future, and if you say, "There is a possibility of freezing it rather than lowering it," or if Trump has not announced it yet, but certain policies go in a direction that can stimulate various inflation that could sanction interest rate cuts, there will be pressure to keep the interest rate gap going because the U.S. will slow down the rate cut or the freeze period will be prolonged. We can say that those are factors that we can influence independence.

◇ Cho Tae-hyun: If Trump's tariff policy in the United States is really true, I think the CPI will be in the 10% range. Anyway, then we can't lower the interest rate. Anyway, this is the situation. At this point, the general observation seems to be that a rate cut seems to be a better option considering various points. It is applied now as the market consensus, but if you think about the last Monetary Policy Committee, it was cut unexpectedly. It's been about a couple of months. Do you think it worked a bit?

◆Cheon-Sora: First of all, the market accepted that the government would cut the rate twice in a row in both October and November, but the domestic demand was not very good. Then, before the effect came out, the exchange rate would increase volatility and domestic demand would shrink sharply as we entered the phase of martial law or impeachment in December. I think these would have caused enough delays or offsetting effects to offset the policy effects.

◇ Cho Tae-hyun: Actually, it has almost negative effects.

◆Cheon-Sora: But there are some problems in the data to determine the effectiveness of the rate cut to some extent, and it takes time because they affect it with a lag. At least six months to a year later, there are some things you can see, and a big event worked in the middle after that, so now the loan interest rate should be lowered at that time, which is the effect of end-users. Rather, there were aspects where loan interest rates were frozen or increased. In terms of risk management, there were some offsetting effects. That's how I see it.

◇ Cho Tae-hyun: But even if we try to revitalize the domestic economy by lowering interest rates, there are many voices saying, "Is that enough?" Some point out that fiscal policy should also be moved together, so what do you think about this?

◆Cheon-Sora: Anyway, it's a very different phase from the situation in October and November of last year. Domestic demand is shrinking more rapidly than then, and the exchange rate is intensifying volatility. Now, not only the IB but also the government and various forecasting institutions are lowering the growth rate of Korea. And not only in 2025, but also in 2026. But if you look at the crisis right now, I think it's a mixture that I don't see as a crisis right now, but in a way, there's a need to respond preemptively. You might think, "Let's do it now and use it then if it's not enough," but I think there is still a limit to the monetary policy alone because I think we need a signal that shows our will to recover domestic demand to some extent. I think it's a situation where fiscal policy should be more active.

◇ Cho Tae-hyun: Then do you think we need to make a voice like this to make the extra budget as soon as possible in terms of soothing psychology or something like that?

◆Cheon-Sora: First of all, the government's policy is to increase early execution. I'm not sure how effective these things will be, but even if you look at the tax deficit last year and two years ago, there will be a situation where you need to issue government bonds. In addition, there may be a problem with trust in these things, such as whether the market can afford to implement fiscal policy in Korea now. That's why I think it's necessary to show some of the will of expansionary fiscal policy.

◇ Cho Tae-hyun: Okay. I hope the political community will move quickly accordingly. Lastly, I'll point out one last thing. I don't think anyone will disagree on the premise of reviving domestic demand. So the government's measures came up with temporary holiday measures. Personally, I think this is Jammo. Do you think it'll be effective?

◆Cheon-Sora: I think it will be half and half, but I feel like I'm avoiding the answer too much. First of all, I think it will be helpful for certain industries in terms of boosting domestic demand.

◇ Cho Tae-hyun: If you say it's a specific industry, travel?

◆Cheon-Sora: Yes, there are talks about tourism and the issuance of consumption coupons at the same time, but if you do this, there may be benefits for workers in the region or the industry. On the other hand, there may be situations in which you have to deliver and transport logistics within a certain production date in the manufacturing industry, and you may have to continue working anyway in these industries. However, if other industries take a break, there may be disruptions in other schedules. Only good industries may be good for domestic demand to be boosted overall, and those that are not may not benefit. And even if these are designated as one-day temporary holidays, it could have a sparkle effect for a day, but these effects of preventing a persistent slowdown in consumption are likely to be limited.

◇ Cho Tae-hyun: There will be some short-term effects. Apart from the effect, I mentioned these things because the number of manufacturing days is reduced, but what policies do you think should be combined in order for these measures to have a really significant effect and help in the mid- to long-term?

◆Cheon-Sora: Anyway, as you just said, there are things like this that can reduce the number of working days. So, in a way, there are inevitable production disruptions in some industries. And there could be manpower problems, and we need an alternative to what to do with these things, so I hope we can predict the damage to such workplaces in advance and take a complementary form. But rather than just subsidizing money, I'm thinking about whether there's a way to indirectly help with tax support or temporary things.

◇ Cho Tae-hyun: I think such a temporary holiday policy will really help revive domestic demand only when a policy that can further supplement certain blind spots and other things is also implemented. So far, I have reviewed various issues surrounding the Monetary Policy Committee with Professor Chun So-ra of the Department of Economics at Inha University. Thank you for talking today.

◆Cheon-sora: Yes, thank you.

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