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Bank of Korea needs to lower interest rates: ING research

A "new neutral" policy interest rate for the Bank of Korea is required by the new normal world.


This is according to the head of Asia research at ING in Singapore, Tim Condon.

"We estimate the 'old neutral' base rate at 4.3 percent, its average during the post- Asian-crisis to pre-financial-crisis. The 'new neutral' base rate should decline by something like the slowdown in nominal GDP growth. Based on these, 3.25 percent is a reasonable estimate of the new neutral,"said Condon.

The BOK left its policy rate unchanged at 3.25 percent last month, keeping its rate freeze stance for the fifth straight month.

"From the supplyside, global prices for grain, livestock, oil and raw materials are expected to decline amid weak demand caused by global economic slowdown. From the demand side, slower economic growth at home will contribute to reduced inflationary pressure," Chung Jin-young, a research fellow at SERI, told Xinhua.

Chung said the BOK would not raise its policy rate until the first half of 2012 due to lingering concerns over large household debts and external uncertainties, predicting that the rate cut would not be made as the easier monetary policy may boost inflation expectations.

Mohamed El-Erian, CEO and co-chief investment officer at PIMCO, coined the concept and phrase "new normal" to describe the post-financial-crisis world of muted growth. In the new normal world, the economy grew at a slower speed, resulting in lower investment returns.

South Korea has already entered the second new normal phase. The first new normal started after the 1997 Asian financial crisis, and the main catalyst for the second one was the 2008 global financial crisis.

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