Lee Min-hyung joined The Korea Times in 2014 and has worked as a journalist mainly in Korea’s finance, tech and automotive industry. He specializes in content creation, breaking news and in-depth analysis currently on transportation and mobility. You can reach him via mhlee@koreatimes.co.kr.
Corona fear presses Bank of Korea to cut base rate in April
Bank of Korea Governor Lee Ju-yeol bangs a gavel during a monetary board meeting at its headquarters in Seoul, on Feb. 27. Yonhap
By Lee Min-hyung
By Lee Min-hyung
The Bank of Korea (BOK) is being pressed to cut its benchmark interest rate by 25 basis points in April's planned monetary policy meeting as current market tumult is being driven by fears over the coronavirus outbreak having an impact on the country's growth momentum.
Economists said interest rate cuts are precisely designed to have an impact on demand-oriented issues; however, the virus is presenting a drastic supply shock, which the central bank's monetary policy cannot help.
The BOK left its key policy rate unchanged at 1.25 percent at its February meeting. While some economists and market participants had been expected a possible cut by 0.25 percentage points due to the virus, the central bank decided to “wait-and-see” the estimated economic impact.
The spread of the virus is posing a dire challenge to the BOK as it desperately seeks to keep the country's economy from further decline. But Governor Lee Ju-yeol said it was too soon to react to the virus, a stance that is being put to the test.
The next monetary policy meeting is scheduled to take place in April when the BOK anticipates fears of the epidemic will have faded. The central bank admitted that the corona-driven falls in domestic consumption and exports were posing a “significant” risk to the economy ― the BOK responded by lowering its earlier 2020 GDP growth forecast to 2.1 percent from 2.3 percent.
From the stock market standpoint, a stretch of losses could extend further as the situation worsens here, despite President Moon Jae-in's government vowing to use all possible means to address COVID-19. The benchmark KOSPI dropped below the 2,000-mark Friday, hit hard by a foreign investors selling spree caused by fears of the effect of the virus. The won-dollar exchange rate has in recent days been on a steep rise in line with investors' preference for safe-haven assets.
As of Friday, the number of COVID-19 infections here surpassed 2,000, with the death toll reaching 13. This is the result of a surge over the past two weeks, as the epidemic shows no signs of abating.
As the crucial April general election is upcoming, the ruling Democratic Party of Korea (DPK) and President Moon are seeking to win a majority of National Assembly seats to avoid possible “lame-duck status.”
It's uncertain whether Cheong Wa Dae's economic team asked the BOK indirectly and unofficially to cut the rate amid worsening economic data and falling facility investment by conglomerates.
“The status quo is the worst-case scenario, as the rapid increase in confirmed cases has seen the bank cut its annual GDP growth forecast by more than 2 percentage points. This surpasses the impact of the MERS outbreak back in 2015,” Lee Mi-seon, an analyst at Hana Financial Group, said. “There is a growing risk that first-quarter GDP growth will decline 0.3 percent, quarter-on-quarter, and the annual growth forecast may fall below 1.8 percent,” Lee said in a note to clients adding she was expecting the BOK to lower its benchmark rate in April.
Lee also predicted the spread of the virus would continue for the time being, as drastic government measures have only been imposed since Feb. 23 when it raised its alert level to the highest.
An economist at U.S.-based investment bank of JPMorgan agreed that the BOK could cut its key rate at the April policy meeting.
“We delay a BOK cut decision call to the April meeting as we still see downside risks to the BOK's growth condition, yet the call is still a close one given the hawkish guidance that the BOK provided,” Park Seok-gil, the bank's economist, said. JPMorgan forecast South Korea's GDP growth to reach 2 percent this year.
Assuming that the virus won't have a long-term negative impact on the country's' economy, Park said the central bank may maintain the status quo during the scheduled April rate-setting meeting.
“The BOK is likely to stand pat at 1.25 percent with no further easing forward guidance,” the economist said. “The implicit assumption should be that the COVID-19 outbreak and supply-side shock will not have a lasting negative spillover onto corporate balance sheets and household income, and that global final goods demand recovery remains intact.”