"Is It an 'Emergency Economic Situation' or a 'War Against Real Estate Speculation'... The Bank of Korea's Dilemma"

The Bank of Korea's Monetary Policy Committee Next Week... Base Rate Decision
Expectations for Rate Cut Rise Again After President's Remarks

Concerns Over Soaring Real Estate Prices If Rates Are Cut Again
Debate on Whether Rate Cut Is the Answer to COVID-19 Weakened Consumption

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] "'Is it an 'emergency economic situation' or a 'war against real estate speculation'?"

As President Moon Jae-in declared an 'emergency economic situation' in response to the novel coronavirus disease (COVID-19) outbreak, the Bank of Korea (BOK) is facing deep concerns. Since President Moon mentioned that "extraordinary measures using all available means are absolutely necessary," there is a growing view that the BOK may also need to cut interest rates. In particular, BOK executive officials have been internally skeptical about whether lowering interest rates can reduce the damage caused by COVID-19, and Governor Lee Ju-yeol has already made hawkish remarks, putting the bank in a difficult position.

On the 19th, Kyobo Securities assessed that the possibility of the Bank of Korea lowering the base interest rate in February remains valid amid ongoing uncertainties related to COVID-19. Analyst Baek Yoon-min of Kyobo Securities said, "The uncertainty surrounding COVID-19 continues, and the negative impact on economic sentiment and the real economy is unlikely to be resolved in the short term," adding, "The government also indicated the need for more proactive actions to defend the economy."

He continued, "We maintain the forecast that the Monetary Policy Committee will cut the base rate by 25 basis points (1bp=0.01 percentage points) to 1.00% in February," and added, "Considering that it takes time to prepare an additional supplementary budget, the possibility of a rate cut in February remains valid."

Following President Moon's remarks, the market is also expecting a rate cut by the BOK. On the previous day in the Seoul bond market, the 3-year government bond yield fell by 4.0bp to 1.270%, and the 10-year yield dropped by 6.0bp to 1.555%. After Governor Lee attended the macroeconomic and financial meeting on the 14th and said, "There are side effects to lowering the base rate, so we will approach it cautiously," the 3-year yield, which had risen to 1.33%, declined again.

However, it is difficult for the BOK to lower rates solely considering the impact of COVID-19. While it is clear that COVID-19 will damage our economy, opinions differ on whether a preemptive rate cut can reduce the extent of the damage.

[Image source=Yonhap News]

The area most affected since the Lunar New Year holiday, when the novel coronavirus began to spread in earnest, is consumption. Offline stores such as movie theaters, marts, and department stores have clearly seen a contraction in consumption. However, it is uncertain whether lowering interest rates will increase offline consumption while COVID-19 is still spreading. A BOK official said, "In a situation where the cause is a disease rather than economic contraction, it is uncertain whether lowering interest rates can stimulate offline consumption or encourage people to gather for meetings they previously avoided," adding, "Especially, just because the COVID-19 crisis ends does not mean people will double their consumption of things they avoided due to the virus, so there are limits to stimulating consumption through rate cuts."

The already high real estate prices under the low-interest-rate environment are also a problem. The government has declared a 'war against real estate speculation forces' and is continuously strengthening regulations on the housing market. The Moon Jae-in administration's 19th real estate measure is expected to be announced as early as the 20th. In this situation, there are concerns that additional base rate cuts will only drive up housing prices. Park Seung-ho, an economic analyst at the National Assembly Budget Office, analyzed, "While interest rates are not the sole cause of rising house prices, they are a significant factor," adding, "Seoul apartment prices have been more affected compared to other regions." If rates are cut and only housing prices rise as a result, criticism may be directed at the BOK.

The fact that the base interest rate is already close to the effective lower bound is also a burden for the BOK. Although the BOK has officially stated that there is room for further rate cuts, it realistically faces concerns about the effective lower bound. The effective lower bound is the minimum interest rate at which monetary policy remains effective, and the market estimates it to be between 0.75% and 1.00%. Considering that as a non-reserve currency country, the effective lower bound should be set higher than that of reserve currency countries, it is not easy to lower rates.

Therefore, the BOK is closely monitoring whether Korea's exports, which showed signs of recovery at the beginning of the year, will decline again, as well as consumer and business sentiment indicators. Exports have recorded negative growth for 14 consecutive months until last month, and there is a possibility that the decline will continue for a 15th consecutive month. The BOK's research department plans to complete its analysis of COVID-19's economic impact by this week. The BOK will hold a Monetary Policy Committee meeting on the 27th to decide on the base interest rate.

This content was produced with the assistance of AI translation services.