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(4th LD) BOK stands pat after emergency rate cut, sees sharp slowdown amid virus fallout

12:41 April 09, 2020

(ATTN: UPDATES with remarks from BOK chief, additional information in paras 11-14, 19-25)
By Byun Duk-kun

SEOUL, April 9 (Yonhap) -- The Bank of Korea (BOK) on Thursday kept its policy rate frozen at an all-time low of 0.75 percent, citing the need to see the effect of steps already taken, but painted a grim growth outlook, forecasting "considerably" slower growth than earlier expected.

"Gross domestic product growth is projected to fall considerably below the February forecast of 2.1 percent, and uncertainties around the future path of GDP growth are also judged to be very high," the BOK said in its monetary policy decision statement.

In the photo provided by the Bank of Korea (BOK), BOK Gov. Lee Ju-yeol (L) and other members of the BOK monetary policy board are seen holding a rate-setting meeting in Seoul on April 9, 2020, in which they voted to keep the policy rate steady at 0.75 percent. (PHOTO NOT FOR SALE) (Yonhap)

"In view of the mounting economic impact of the COVID-19 pandemic, the Board will conduct monetary policy in an accommodative manner in order to mitigate downside risks to the economy and ease volatility in financial markets," it said.

"In this process it will judge whether to adjust the degree of monetary policy accommodation, while thoroughly assessing the severity of the COVID-19 outbreak, its impact on the domestic economy and financial markets and changes in financial stability," it added.

The latest monetary policy decision came less than four weeks after the South Korean central bank delivered an emergency rate cut on March 16, slashing the policy rate by a whopping half a percentage point to the record low of 0.75 percent.

The BOK's first emergency rate cut in more than a decade came five days after the World Health Organization declared the spread of COVID-19 a pandemic.

South Korea reported its first COVID-19 case on Jan. 20. The virus has since infected 10,423 people as of Thursday while killing 204.

The central bank's latest growth projection of 2.1 percent in February marked a sharp downward revision from 2.3 percent forecast late last year.

Many now expect the South Korean economy to grow less than 1 percent this year, while some even anticipate a contraction.

Global rating agency Moody's Investors Service has lowered its growth outlook for South Korea to 0.1 percent, with the Asian Development Bank slashing its growth projection to 1.3 percent from the previous 2.3 percent last week.

BOK Gov. Lee Ju-yeol said it may be too soon to determine the economic impact of the new coronavirus outbreak but insisted the local economy will likely post positive growth this year.

"Economic growth, not just that of South Korea but the entire world, depends entirely on the course of the new coronavirus outbreak at least this year," Lee told a press briefing.

"Based on the current scenario, we believe the local economy will likely post a positive growth this year," he said.

Lee, however, noted the possibility of a global recession is "highly likely."

Still, experts here expect the central bank to keep its policy rate steady for some time.

A check-in counter is almost deserted at the departure lobby of Incheon airport, west of Seoul, on March 24, 2020, in this file photo. (Yonhap)

"With its active steps taken in advance against an economic slowdown and liquidity crunch caused by COVID-19 in the forms of an emergency rate cut and Korean-style quantitative easing, the BOK is expected to monitor the effect of the preceding measures," Daishin Securities analyst Kong Dong-rak said earlier.

Kong was one of 15 analysts who expected to see a rate freeze this week in a poll conducted by Yonhap Infomax. Only three others had anticipated a rate cut.

Also, only seven out of the 18 experts surveyed anticipated an additional rate reduction before the year's end.

The BOK chief said two board members voiced a need to further slash the base interest rate by a quarter percentage point.

He refused to comment on the possibility of a rate reduction down the road.

"We are supposed to take necessary steps in accordance with conditions. I may not comment on the possibility of a rate cut in May but will instead say we still have room for monetary policy," Lee said.

"Also, I note the BOK is actively utilizing other policy measures, along with monetary policy steps, to deal with the current situation," he added.

The BOK's policy rate had stayed at 1.25 percent since October, higher than that of the United States, which created a constant source of capital outflow from South Korea.

The U.S. Fed delivered two emergency rate cuts last month to send its policy rate to a target range of zero percent and 0.25 percent.

"The effective lower boundary varies, instead of being fixed. For instance, our lower boundary may go down when the interest rate of an advanced country goes down. And in that sense, it is true that we still have room to deal with the fallout from the new coronavirus with a monetary policy decision," the top central banker told the press briefing.

Steps taken by the BOK against the coronavirus outbreak include the "unlimited" purchase of local bonds in repo operations to boost market liquidity.

The central bank on Thursday added mortgage-backed securities and special bank bonds, or certificates of deposit, to the list of bonds it can purchase to help boost market liquidity.

An earlier report said nearly 15 trillion won (US$12.4 billion) worth of bonds floated by large local companies will mature in the second quarter.

A retail outlet in Seoul is quiet amid the continued spread of the new coronavirus on March 18, 2020, in this file photo. (Yonhap)

"The BOK is aware of market concerns over the amount of corporate bonds and commercial papers (CPs) set to mature in April, which is relatively large, but it believes there will not be a serious problem in refinancing the debts, considering the demand of the market itself for corporate bonds and CPs, the expansion of market liquidity by the central bank, and the size of the market stabilization fund to be created (at 20 trillion won)," the BOK said earlier.

The BOK is regularly purchasing local bonds in its repo operations aimed at injecting additional market liquidity. It purchased 5.2 trillion won in its first such operation last week.

It has also delivered more than US$14 billion in U.S. dollars to local banks under its bilateral currency swap arrangement with the U.S. Fed designed to help stabilize the local foreign exchange market.

The Korea-U.S. currency swap deal is worth $60 billion. South Korea has currency swap arrangements with at least eight other countries, worth more than $190 billion in total.

bdk@yna.co.kr
(END)

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