South Korea ruling party says not campaigning for BOK to cut rates

[SEOUL] South Korea's ruling party stepped back on Thursday from an election campaign pledge widely seen as an attempt to goad the independent central bank into cutting interest rates, saying it was just proposing more tightly targetted economic policies.

"Interest rate policy is a blunt axe. At this point, an interest rate cut by the Bank of Korea carries little meaning," said Cho Won Dong, a campaign official in charge of policy at the ruling Saenuri (New World) Party, in a phone call with Reuters.

"Instead, the bank should specifically target liquidity, sort of like performing surgery. This is the core of our recent macro-economic campaign goals." Mr Cho's comments were intended to explain a campaign pledge put out earlier this week committing the Saenuri Party to press for new policy measures from the central bank.

Markets had initially perceived this as an attempt by the ruling party to pressure the Bank of Korea (BOK) into cutting rates, which is supposed to be done independently from the government or parliament.

The party's economic policy pledge, part of its campaign for parliamentary elections on April 13, attracted a great deal of local media and bond market attention, given the Bank of Korea's legal independence.

Mr Cho suggested the central bank's charter could be amended to enable the BOK to buy bonds from the Industrial Bank of Korea or to buy mortgage-backed securities to boost monetary stimulus.

"Right now when we look at our interest rate policy, we are in a liquidity trap. Liquidity increases (after rate cuts) but actual money flows show no change," he said.

Currently the central bank is only allowed to purchase treasury bonds and government-backed securities.

A majority of market players expect the Bank of Korea to lower rates next month from the current 1.5 per cent level as the ongoing recovery has been sluggish, although some recent policymaker comments and data have been watering down such views.

REUTERS