Why Couldn’t the Bank of Korea Lower Interest Rates?

1. Understanding Monetary and Fiscal Policy

The two main pillars that adjust the South Korean economy are fiscal policy and monetary policy.

Fiscal policy is managed by the government, particularly the Ministry of Economy and Finance, and includes tax policy and government spending.
In contrast, monetary policy is handled by the Bank of Korea, with the benchmark interest rate decision being a key tool.

Monetary policy is a strategy to coordinate economic growth by lowering or raising interest rates.

Lowering the benchmark interest rate reduces companies’ investment costs, leading to increased investment, job growth, and consumption.
However, interest rates cannot always be lowered.

2. The Impact of Interest Rate Cuts on the Economy

When interest rates are lowered, companies can borrow money more cheaply, which boosts their willingness to invest.

For example, if a company expects a 5% return on a particular project, they might hesitate to invest if the interest rate is 4% or higher.
However, if the interest rate drops to 2-3%, the expected return on the same project becomes more attractive, leading to increased investment.

Increased investment leads to job creation, which then raises income levels, boosts consumption, and encourages further production expansion by companies.
This virtuous cycle has a positive impact on economic growth.

3. Limitations and Challenges of Interest Rate Cuts (Why Couldn’t Interest Rates be Lowered?)

(1) Conflict of Interest

Interest rate policies have different effects on different economic actors.

Borrowers: Hope for reduced debt burdens through interest rate cuts.
Savers: Expect higher interest income when interest rates are raised.
People Without Homes: Hope that lowering interest rates will reduce housing prices.
Wealthy Older Individuals: Concerned about the decline in asset value.

These conflicting interests make it difficult to coordinate interest rate policies.

(2) The Role and Limitations of the Bank of Korea

The Bank of Korea does not try to reconcile interests; instead, it makes policy decisions based on its three primary objectives.
These three objectives are:

Price Stability
Economic Stability
Financial Stability

(3) Current Economic Situation Analysis

Reasons to Lower Interest Rates:

Need to revive domestic demand amid economic slowdown.
Stimulate the economy by boosting consumption and investment.

Reasons for Not Lowering Interest Rates:

Inflation Concerns: Price instability due to rising international oil and natural gas prices.
Energy prices are rising due to cold weather and geopolitical instability (Russia-Ukraine situation).
Exchange Rate Stability: In a strong dollar environment, lowering interest rates could lead to a rise in the exchange rate (weakening of the Korean won).
A rise in the exchange rate increases import costs, further stimulating inflation.
Impact on Foreign Exchange Markets: Lowering interest rates could lead to an outflow of foreign capital.

This would threaten the stability of the financial markets.

4. The Bank of Korea’s Prudent Decision

Ultimately, the Bank of Korea understands the need to stimulate the economy, but it cannot lower interest rates due to serious factors like inflation and foreign exchange market instability.
Stabilizing the exchange rate and inflation are deemed higher priorities than lowering interest rates.

Through this decision, the Bank of Korea aims to minimize uncertainty in the domestic financial environment.

< Summary >

The Bank of Korea implements monetary policy by adjusting interest rates among fiscal and monetary policies.
Lowering interest rates stimulates the economy by increasing investment and consumption, but it cannot be used in all economic situations.
The Bank of Korea has withheld interest rate cuts considering the three goals of price stability, economic stability, and financial stability.
The current strong dollar and price instability were deemed more serious issues than the existing economic slowdown.
Therefore, they focused on maintaining stable economic conditions instead of lowering interest rates.

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*YouTube Source: [경제 읽어주는 남자(김광석TV)]

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Comparing US and European Companies: Market Cap and Tech-Centric Economic Trends

1. Comparison of Market Cap Between US and European Companies

Gap Between US and Europe: US companies have experienced a rapid surge in market cap since the 2008 financial crisis, with the S&P 500 reaching approximately $55 trillion. In contrast, Europe’s market cap is stagnant due to the lack of major tech companies.
European Reality: The center of the global tech industry is the US. Except for a few European tech companies like SAP and ASML, there are hardly any companies that hold a global presence.
US Big Tech Dominance: Big tech companies such as Amazon, Apple, Google, and MS dominate the market, wielding economic power that surpasses GDP.

2. Warnings About the Tech Bubble and the Role of the AI Era

Tech Bubble Controversy: There are concerns about a bubble in the current tech-centered market, reminiscent of the dot-com bubble of the 2000s. The annual 20-30% stock price increases and repeated growth rates are seen as signs of overheating.
Potential Resurgence Through AI: AI technology has the potential to create a new paradigm shift, further expanding the market cap of tech companies. The transition from smartphones to AI.

3. The Impact of Global Financial and Policy Changes on the Stock Market

Interest Rates and the Stock Market: Interest rates primarily have a significant impact on the stock market only when they reach a “new level.” The US interest rate of 4.7% is a critical inflection point.
Strong Dollar: Although temporarily subdued, the strong dollar is expected to continue due to the US’s economic power and global political and economic uncertainties.

4. Investment Strategy: Preparing to ‘Sell’ Smartly

Conditions for Selling Smartly:
1. Must Have Something to Sell: Consider strategic selling after buying, even in a bubble.
2. Eliminate Regret: Maintain a mindset of taking even small profits.
Focus on AI-related Stocks: AI-related stocks are predicted to strongly dominate the market in the second half of the year.

5. Limitations of European and Japanese Markets and the US Monopoly

European Stagnation: Europe lacks global competitiveness and remains at past high levels.
Japanese Case: Japan’s Nikkei index has remained at the same level for 35 years since 1990, having fallen out of the global tech focus.

6. Ramifications of Changes in US Policy and Power

Tech vs. Government Power Struggle?: There are concerns that the power of tech companies, especially with innovative technologies like AI, could surpass national power.
US Big Picture with China: The era of US tech company dominance in the global economic flow is likely to solidify.

< Summary >

US big tech companies are dominating the global market, while the European market is relatively stagnant. AI is the key to opening a new era of supremacy, and despite the possibility of a stock bubble, a smart investment strategy is needed.