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Bank of Korea urged to slash base rate near zero

Bank of Korea Governor Lee Ju-yeol speaks in a press conference after holding a monetary policy board meeting on March 16 when the central bank slashed the benchmark interest rate by 50 basis points to 0.75 percent. Yonhap
Bank of Korea Governor Lee Ju-yeol speaks in a press conference after holding a monetary policy board meeting on March 16 when the central bank slashed the benchmark interest rate by 50 basis points to 0.75 percent. Yonhap

By Lee Min-hyung

The Bank of Korea (BOK) needs to slash the key interest rate again to a new record low, as the coronavirus pandemic continues to hit consumer prices and cast a murky outlook on projections for the nation's real GDP growth in 2020, economists argued.

The central bank forecasted the annual GDP growth to reach 2.1 percent in February when the COVID-19 shock had not yet escalated into a global pandemic.

But with the local economy starting to be hit hard by the COVID-19 panic in March, the BOK cut the benchmark rate by 50 basis points to a record low of 0.75 percent. The decision came as a surprise in that the central bank has for decades remained conservative in its monetary policy.

Despite what appears to be a bold move from the BOK, market experts said the current rate level is "not enough" to tackle the virus-induced economic downturn here.

Against the backdrop, there is nothing strange in the central bank deciding to take another bold decision by cutting the rate to the near-zero range, they said. An upcoming monetary board meeting is scheduled for May 28.

"The annual GDP growth target is getting farther away from the goal of the central bank amid the prolonged pandemic shock across the globe," Korea Capital Market Institute economist Kang Hyun-joo said.

"The declining GDP growth forecast, along with slowing consumer prices, is raising strong calls for an additional rate cut. It is theoretically reasonable for the central bank to push for a further rate cut during the upcoming monetary policy board meeting."

The economist, however, argued that chances are the central bank will opt to maintain the status quo during the meeting in consideration of the longtime conservative nature of the BOK's monetary policy.

"The BOK has so far remained super-conservative in adjusting prices by cutting or raising the key interest rate," Kang said. "We are leaving open the possibility that the central bank keeps the current level unchanged during the upcoming meeting, as it has for months taken a series of other steps to expand market liquidity by providing loans at a low interest rate to those hardest hit by the virus.

But given the worsening real economy here, it is reasonable for the BOK to slash the rate further as early as possible, he said.

The Korea Development Institute (KDI), a state-run think tank, also urged the central bank to take a more drastic monetary easing policy to rev up the virus-hit sagging economy.

"Our view is that the BOK needs to cut the base rate to the lowest possible level, and introduce quantitative easing," KDI fellow Jung Kyu-chul said.

The think tank called on the central bank to be more aggressive in its monetary policy to minimize the economic impact in the post-virus era.

The coronavirus crisis is likely to take a heavier toll on the economy by possibly causing large-scale corporate bankruptcy and mass layoffs, so the central bank and financial authorities here should brace for the worst-case scenario by proactively introducing unprecedented and bold steps, it said.

KDI also urged the central bank to mobilize even non-traditional monetary policies, such as purchases of government bonds to expand market liquidity.

Cho Dong-chul, a former monetary board member who currently serves as a professor at KDI, also advised the central bank to consider cutting the base rate further.

"The BOK still has room for additional rate cuts, compared to central banks from other developed countries ― such as the United States," he said in a seminar. The U.S. Federal Reserve cut the benchmark interest rate to a range of 0 to 0.25 percent amid the escalating virus shock there.

"The central bank needs to consider opening the zero-rate era and take steps for quantitative easing."



Bank of Korea Governor Lee Ju-yeol speaks in a press conference after holding a monetary policy board meeting on March 16 when the central bank slashed the benchmark interest rate by 50 basis points to 0.75 percent. Yonhap
Bank of Korea Governor Lee Ju-yeol speaks in a press conference after holding a monetary policy board meeting on March 16 when the central bank slashed the benchmark interest rate by 50 basis points to 0.75 percent. Yonhap

By Lee Min-hyung

The Bank of Korea (BOK) needs to slash the key interest rate again to a new record low, as the coronavirus pandemic continues to hit consumer prices and cast a murky outlook on projections for the nation's real GDP growth in 2020, economists argued.

The central bank forecasted the annual GDP growth to reach 2.1 percent in February when the COVID-19 shock had not yet escalated into a global pandemic.

But with the local economy starting to be hit hard by the COVID-19 panic in March, the BOK cut the benchmark rate by 50 basis points to a record low of 0.75 percent. The decision came as a surprise in that the central bank has for decades remained conservative in its monetary policy.

Despite what appears to be a bold move from the BOK, market experts said the current rate level is "not enough" to tackle the virus-induced economic downturn here.

Against the backdrop, there is nothing strange in the central bank deciding to take another bold decision by cutting the rate to the near-zero range, they said. An upcoming monetary board meeting is scheduled for May 28.

"The annual GDP growth target is getting farther away from the goal of the central bank amid the prolonged pandemic shock across the globe," Korea Capital Market Institute economist Kang Hyun-joo said.

"The declining GDP growth forecast, along with slowing consumer prices, is raising strong calls for an additional rate cut. It is theoretically reasonable for the central bank to push for a further rate cut during the upcoming monetary policy board meeting."

The economist, however, argued that chances are the central bank will opt to maintain the status quo during the meeting in consideration of the longtime conservative nature of the BOK's monetary policy.

"The BOK has so far remained super-conservative in adjusting prices by cutting or raising the key interest rate," Kang said. "We are leaving open the possibility that the central bank keeps the current level unchanged during the upcoming meeting, as it has for months taken a series of other steps to expand market liquidity by providing loans at a low interest rate to those hardest hit by the virus.

But given the worsening real economy here, it is reasonable for the BOK to slash the rate further as early as possible, he said.

The Korea Development Institute (KDI), a state-run think tank, also urged the central bank to take a more drastic monetary easing policy to rev up the virus-hit sagging economy.

"Our view is that the BOK needs to cut the base rate to the lowest possible level, and introduce quantitative easing," KDI fellow Jung Kyu-chul said.

The think tank called on the central bank to be more aggressive in its monetary policy to minimize the economic impact in the post-virus era.

The coronavirus crisis is likely to take a heavier toll on the economy by possibly causing large-scale corporate bankruptcy and mass layoffs, so the central bank and financial authorities here should brace for the worst-case scenario by proactively introducing unprecedented and bold steps, it said.

KDI also urged the central bank to mobilize even non-traditional monetary policies, such as purchases of government bonds to expand market liquidity.

Cho Dong-chul, a former monetary board member who currently serves as a professor at KDI, also advised the central bank to consider cutting the base rate further.

"The BOK still has room for additional rate cuts, compared to central banks from other developed countries ― such as the United States," he said in a seminar. The U.S. Federal Reserve cut the benchmark interest rate to a range of 0 to 0.25 percent amid the escalating virus shock there.

"The central bank needs to consider opening the zero-rate era and take steps for quantitative easing."



Lee Min-hyung mhlee@koreatimes.co.kr


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