BOK cuts rates and growth estimate to minus 0.2%

Economy

Published: 28 May. 2020, 19:28

BOK cuts rates and growth estimate to minus 0.2%

Bank of Korea Gov. Lee Ju-yeol is seen at a monetary policy board meeting on Thursday in which the committee decided to cut interest rates by 25 basis points. [BANK OF KOREA]

The Bank of Korea (BOK) cut the benchmark interest rate by 25 basis points Thursday, bringing it to a historic low of 0.5 percent. It also revised the country’s growth outlook to minus 0.2 percent this year, a shuddering drop from its 2.1 percent growth forecast in February.

“Household income growth is forecast to decelerate significantly due to sluggish employment, slower wage growth and decreased self-employment income,” the bank said in a statement Thursday. “Exports of goods are forecast to shift to a decline due to the global spread of Covid-19 this year, but are expected to improve modestly from the second half.”

It is the second time the central bank slashed interest rates since the outbreak of the coronavirus. In March, the bank made an emergency cut by 50 basis points to 0.75 percent after the declaration of a pandemic by the World Health Organization.

It was the bank’s first negative growth outlook time since 2009. There have been two times when the country actually recorded minus growth: a 1.6 percent contraction in 1980 and a 5.1 percent contraction in 1998.

The BOK had projected the country’s economy to grow at 2.1 percent in February, a slight revision from its previous 2.3 percent estimate before the coronavirus hit the global economy. Even in April, BOK Gov. Lee Ju-yeol said growth would not go negative, but manage to stay above 0 percent.

“Since April, we noticed that the global state of the coronavirus is settling down slower than we initially expected,” Gov. Lee Ju-yeol said during a briefing Thursday.

Dismal figures for jobs and exports contributed to the sharp cut in the growth outlook.

According to BOK data, the country is expected to add a mere 30,000 new jobs in 2020 compared to 300,000 in 2019.

Korea Customs Service data also showed that exports in April dropped by 24.3 percent on year followed by an additional 20.3 percent drop in the first 20 days of May.

The bank warned that if the number of the infected people in the world peaks in the third quarter and decreases slower than it expects, Korea’s economy will contract even further — by 1.8 percent — this year.

A 25 basis point cut to the country’s key interest rate was voted on unanimously by the six participating members of the reshuffled Monetary Policy Committee as worries over negative growth this year grew. Cho Yoon-je, one of three new members who joined the Monetary Policy Committee in April, was unable to participate in the vote due to his holding of stocks that exceeded a 30 million won limit set by the Public Service Ethics Act.

The bank also hinted at purchases of government bonds as the government cranks up spending — including some 24 trillion won in two stimulus packages in the past months — to counter the coronavirus slowdown. A third supplementary budget is expected soon.

“We are closely monitoring the market anxiety derived from unbalanced supply and demand of government bonds,” said Lee. “[If additional bonds are issued through the third supplementary budget,] and long-term interest rate volatility intensifies, the bank is ready to actively engage in purchasing treasury bonds for the sake of market stabilization.”

An additional rate cut seems unlikely at least for this year according to analysts as the rate’s effective floor is around 0.5 percent.

“The possibility of an additional rate cut is very low,” said Kim Myoung-sil, a fixed-income analyst at Shinhan Investment. “Unless the U.S. Fed decides to implement a minus base rate, it would be burdensome for the BOK to make an additional cut."

There was disappointment in the market at the central bank's statement on purchasing bonds.

"The central bank wasn't aggressive enough on its determination to buy government bonds," said Ahn Jae-kyun an analyst at Korea Investment & Securities. "Instead of pointing out that it would engage in the market when the volatility of long-term interest rates intensifies, it should have emphasized that the bank is ready to support the stabilization of supply and demand of state bonds when the third supplementary budget is issued."

The bank estimated the country’s GDP will grow 3.1 percent in 2021. Consumer prices were forecast to increase by 0.3 percent in 2020 and by 1.1 percent in 2021.

BY JIN EUN-SOO [jin.eunsoo@joongang.co.kr]