Growing Possibility of Interest Rate Cuts Due to the Emerging Novel Coronavirus

Global IBs Predict Possible Interest Rate Cuts in Korea One After Another

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] As the novel coronavirus infection (Wuhan pneumonia) spreads, expectations for the Bank of Korea to cut its base interest rate are growing. Last year, the economic growth rate barely reached 2.0%, and concerns are rising that the domestic economy will be hit by the spread of the novel coronavirus, leading to the logic that the Bank of Korea may respond with a rate cut.

According to the financial investment industry on the 9th, global investment bank (IB) JP Morgan stated that the impact of the novel coronavirus is expected to increase, and "the Bank of Korea is expected to cut the base interest rate by 0.25 percentage points at the February Monetary Policy Committee meeting." JP Morgan explained, "Reflecting the faster-than-expected transmission speed of the novel coronavirus and the expansion of factory closures in China, we forecast South Korea's first-quarter gross domestic product (GDP) growth rate (quarter-on-quarter, seasonally adjusted) at -0.3%, and accordingly, we have revised down the annual growth forecast."

It added, "South Korea's manufacturing industry is closely linked to the Chinese supply chain," and analyzed, "South Korea exports 41% of its intermediate goods to China while importing 23% of intermediate goods from China."

Barclays also forecast that the likelihood of the Bank of Korea cutting rates in the first half of the year has increased. Barclays stated, "If the novel coronavirus is not controlled, the Bank of Korea's growth forecast of 2.3% for this year could face significant downside risks." It also pointed out that the expiration of the terms of the Bank of Korea's Monetary Policy Committee members in April complicates the situation further.

Japan's Mitsubishi UFJ Financial Group (MUFG) also indicated that if the novel coronavirus continues to spread, the Bank of Korea may cut rates up to twice this year. Cliff Tan, MUFG's East Asia head, appeared on Bloomberg News and said, "If the situation worsens, China's growth rate this year could fall by 1 to 2 percentage points, which would cause South Korea's growth rate to drop to the 1.5% range. Since the South Korean government is unlikely to tolerate this, a rate cut scenario is possible."

The Bank of Korea will hold a Monetary Policy Committee meeting on the 27th to decide the base interest rate. On that day, the Bank of Korea will announce a revised economic outlook reflecting the impact of the novel coronavirus on the domestic economy. In November last year, the Bank of Korea forecast this year's growth rate at 2.3%.

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