Freeze of base rate does not match gloomy growth outlook
The Bank of Korea held its benchmark interest rate steady at a monetary policy board meeting Thursday. Some analysts had forecast the BOK might lower its policy rate to stem the adverse effects of the coronavirus outbreak, but the central bank has taken a cautious stance, for now.
Five of the seven board members decided to maintain the status quo and observe the situation further, having taken into account the various, potential ill-effects of a rate cut such as an increase in soaring household debt, a rekindling of property speculation and a possible capital outflow. While industry insiders understand the monetary policymakers' caution, we also hope that they will not miss the timing for a rate reduction that would minimize the economic fallout from the public health crisis.
BOK Governor Lee Ju-yeol said the board froze the key rate on the premise that the novel coronavirus's spread would peak in March. The central bank's cautious stance since the two rate cuts last year reflects its concern that lowering interest rates amid overflowing liquidity might do more harm than good to the economy.
Equally worrisome is the widening of the interest rate gap between Korea and the U.S. from 0.5 percentage points to 0.75 percentage points, sparking an outflow of foreign funds. Overseas investors have withdrawn a daily average of more than 800 billion won ($660 million) from the local bourse over the past three days, sparking jitters among industry insiders.
The central bank's prudence may be right ― if these were ordinary times. The country, however, is not in leisurely circumstances. Korea Inc. stands at the crossroads between collapse and resurrection. COVID-19 is dealing a severe blow to both exports and domestic consumption, and few can say for sure when the current crisis will be over. In a worst-case scenario, Korea's economy could fall into a bottomless pit.
The government has set about to formulate an extra budget. We believe fiscal and monetary policies can produce maximal effects when they are utilized together. The BOK has readjusted its growth outlook for 2020 from 2.3 percent to 2.1 percent. We are afraid the central bank is remaining too optimistic, and hope this is not an excuse to hold the rate steady. Excessive optimism could prove worse than pessimism.
The Bank of Korea held its benchmark interest rate steady at a monetary policy board meeting Thursday. Some analysts had forecast the BOK might lower its policy rate to stem the adverse effects of the coronavirus outbreak, but the central bank has taken a cautious stance, for now.
Five of the seven board members decided to maintain the status quo and observe the situation further, having taken into account the various, potential ill-effects of a rate cut such as an increase in soaring household debt, a rekindling of property speculation and a possible capital outflow. While industry insiders understand the monetary policymakers' caution, we also hope that they will not miss the timing for a rate reduction that would minimize the economic fallout from the public health crisis.
BOK Governor Lee Ju-yeol said the board froze the key rate on the premise that the novel coronavirus's spread would peak in March. The central bank's cautious stance since the two rate cuts last year reflects its concern that lowering interest rates amid overflowing liquidity might do more harm than good to the economy.
Equally worrisome is the widening of the interest rate gap between Korea and the U.S. from 0.5 percentage points to 0.75 percentage points, sparking an outflow of foreign funds. Overseas investors have withdrawn a daily average of more than 800 billion won ($660 million) from the local bourse over the past three days, sparking jitters among industry insiders.
The central bank's prudence may be right ― if these were ordinary times. The country, however, is not in leisurely circumstances. Korea Inc. stands at the crossroads between collapse and resurrection. COVID-19 is dealing a severe blow to both exports and domestic consumption, and few can say for sure when the current crisis will be over. In a worst-case scenario, Korea's economy could fall into a bottomless pit.
The government has set about to formulate an extra budget. We believe fiscal and monetary policies can produce maximal effects when they are utilized together. The BOK has readjusted its growth outlook for 2020 from 2.3 percent to 2.1 percent. We are afraid the central bank is remaining too optimistic, and hope this is not an excuse to hold the rate steady. Excessive optimism could prove worse than pessimism.
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