Why Korea is not yet ready for rate cuts

Macro policies must target risks first, says analyst.

According to Nomura, Korean policymakers have succeeded in slowing the increase of leverage, at least for now, but the still-high figure (both in the level and change of leverage) suggests that Korea‟s macro policies should remain focussed on managing risk rather than accelerating growth, even if growth improves only modestly.

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Korea‟s debt-to-GDP ratio rose to 260% in 2012, but its five-year rolling change fell from 61 percentage points (pp) in 2009 to 41pp in 2012. The Asian currency crisis and the Lehman crisis both occurred after the five year change in Korea‟s leverage surged to 50pp.

Given our view that incoming data should improveslightly, we believe the Bank of Korea is wary of accelerating a growth recovery via further rate cuts, asthis could further raise the economy‟s leverage ratio. We maintain our call for no rate cuts in 2013.