Bank of Korea cuts 2020 growth outlook to -1.3%

Bank of Korea (BOK) Governor Lee Ju-yeol bangs a gavel during a policy rate-setting meeting at the bank in Seoul, Thursday. Yonhap

Key interest rate remains untouched at 0.5%

By Lee Kyung-min

The Bank of Korea (BOK) forecast Thursday that the economy will contract 1.3 percent in 2020 due to the fallout of the prolonged COVID-19 pandemic.

The outlook, which would be the worst performance since 1998 in the aftermath of the Asian financial crisis, was sharply revised down from the 0.2 percent contraction projected in May. In its regular rate setting meeting, the central bank kept the key rate unchanged at 0.5 percent.

“The downgrade was due to a resurgence of coronavirus cases here and the worldwide pandemic showing no signs of decline,” BOK Governor Lee Ju-yeol said during an online press conference from the BOK's headquarters in Seoul.

“Accordingly, exports and domestic consumption are likely to recover slower than expected,” he added. “Worse-than-expected exports for the second quarter and heavy rainfall were also factored in.”

Against this backdrop, Lee said the central bank will continue to maintain an accommodative monetary policy, hinting that it will make another rate cut to prevent the economy from collapsing.

He said the central bank still has some limited room to maneuver.

“We have injected a large amount of liquidity into the market as part of quantitative easing in a broader sense of the concept. Lowering the key base rate could be an option, but this must be pursued with caution after deep consideration,” he added.

The central bank predicted the Korean economy will grow 2.8 percent in 2021, down 0.3 percentage points from May's forecast of 3.1 percent.

It added the country needs to record a mid-1 percent quarter-on-quarter growth in both the third and fourth quarters to meet the 1.3 percent contraction prediction.

The governor said that the central bank will also consider a purchase of government bonds to prevent wild fluctuation in yields on long-term bonds.

The demand for government bonds from local and foreign financial firms remains robust for now, which Lee views as a basis for limited concerns triggered by a short-term mismatch between supply and demand.

But if the yields on long-term bonds show signs of swinging wildly after what currently remains steady widens, the central bank will being buying a large amount of them.

“We have been and are ready to push ahead with a large amount of government bond purchases,” BOK Governor Lee Ju-yeol said during the press conference.

The reiterated commitment to an expansionary drive will be pursued with variables including long-maturity bond yields, credit spreads and changes in the yield curve, he added.

“Necessary scenarios are under review. We will take into account sales volume in the bond market among other factors when the need to purchase arises.”

The governor made it clear that yield curve control is not being considered as a viable, immediate policy tool, a decision he said must be pursued with caution. The interest rate-capping method of stimulating the economy works by the central bank pledging to buy enough long-term bonds to a targeted rate in an effort to keep the rate from rising above the target.

“Case studies overseas indicate varying effects and consequences of the control, all on which we maintain close monitoring. The measure will not be put into action in the near term.”