Bank of Korea under mounting pressure to cut base rate amid coronavirus worries

By Lee Min-hyung

The Bank of Korea (BOK) is under pressure to lower its key interest rate this month as the local economy remains vulnerable to coronavirus shocks from China.

With the virus spreading across China and neighboring countries, overseas investment banking firms, such as JP Morgan, have raised the likelihood of the BOK cutting the rate by 0.25 percentage points to 1 percent.

They said the Korean economy ― driven by the manufacturing sector ― would fall victim to China's recent decision to suspend operations of major factories there due to growing fears of the spread of the epidemic.

Local economists say there is a 50 percent chance that the central bank will push ahead with the monetary easing.

“Even if the BOK decides to cut the rate further in February, there is nothing strange in that the economy has already undergone a prolonged downturn regardless of the outbreak of the coronavirus,” said Yonsei University economics professor Sung Tae-yoon.

“But it is not proper for the central bank to make the decision simply in consideration of the potential economic impact of the virus here,” he said. “The government should settle such issues with relevant budget measures rather than by simply cutting the base rate.”

Park Sang-hyun, an analyst at Hi Investment & Securities, expected the BOK to freeze the rate, noting it was still impossible to predict how exactly the virus will cause economic damage here.

“We cannot rule out the possibility of a future rate cut, but my view is that the central bank will decide to keep the status quo by taking a wait-and-see attitude,” he said.

If the virus outbreak is prolonged and keeps weighing on the Korean economy's second-quarter growth, chances are the BOK will cut the rate in the second half of 2020, the economist added.

The Korea Development Institute said Sunday the epidemic has created a sense of “economic uncertainty” here. The state-run think tank also noted the outbreak will keep having negative impacts on the economy particularly in the services industry and on exports.

Hansung University economist Kim Sang-bong was also skeptical of the potential rate cut, as the move will unlikely create a positive ripple effect to rev up the economy.

“Simply put, the possible drop in the key interest rate is nothing more than a theoretical message that the BOK reflects on the market,” he said. “The real estate market is the only de facto area that can take advantage of the move.”

He also remained neutral over the possibility that the BOK will cut the rate in the latter half of the year.

“Economic indices will show clearer signs of a rebound from the third quarter, but this will be mostly due to a base effect from the comparable period last year when the economy was worse.”

It is likely that the virus will drive down the nation's first-quarter economic growth to some extent, while the outlook for a near-term rebound remains very slim at the moment, he added.

The viral outbreak has also driven down the yield on three-year government bonds. According to the Korea Financial Investment Association, the figure stood at 1.28 percent Feb. 7, down from 1.46 percent Jan. 20 when the virus started making headlines.

Foreign experts said the spread of the virus would put a brake on economic growth particularly in China and its neighboring countries.

“Current estimates suggest that we might see around a0.2 percent to 0.4 percent decline in world growth in 2020 because of the virus with, of course, much larger effects in China and Asia,” Antonia Fatas, an economics professor at INSEAD, said.

“It might be that in the first quarter of this year, we will see growth hovering close to zero or in negative numbers for some Asian economies.”