Lee Ju-yeol, BOK Governor, Holds Emergency Executive Meeting to Discuss Response to US 'Surprise Interest Rate Cut'

Fed, Additional Rate Cut Expected at March FOMC
Bank of Korea May Hold Emergency Monetary Policy Meeting to Follow Rate Cut

Lee Ju-yeol, Governor of the Bank of Korea [Image source=Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] Following the surprise interest rate cut by the U.S. Federal Reserve (Fed), expectations are growing that the Bank of Korea (BOK) will soon lower its benchmark interest rate as well. The BOK had kept rates unchanged just five days before the Fed's decision to cut rates by 50 basis points (1bp = 0.01 percentage points).

On the 4th, BOK Governor Lee Ju-yeol held an emergency executive meeting starting at 9 a.m. to discuss response measures to the Fed's rate cut. Originally, the BOK had planned to hold a Monetary and Financial Policy Committee meeting chaired by First Vice Governor Woo Sang-dae from 8:20 a.m., but the format was changed to a meeting presided over by the Governor. This reflects the importance of the issue.

Market experts view the BOK's use of the rate cut option as a foregone conclusion. With the Fed's rate cut resolving the benchmark rate inversion, the risk of capital outflow has also diminished.

The key factor is timing. The BOK may hold an extraordinary Monetary Policy Committee meeting in March and implement a rate cut sooner than expected. Since the Fed is likely to cut rates further at the Federal Open Market Committee (FOMC) regular meeting on the 17th-18th (local time), there is a scenario where the BOK follows suit after reviewing the FOMC outcome. The BOK also held an extraordinary monetary policy meeting at the end of October 2008 during the financial crisis and cut rates by 75bp. There is also a possibility that the BOK will lower rates in conjunction with the supplementary budget bill (chugyeong) to maximize synergy.

However, most experts agree that the BOK is more likely to cut rates at the scheduled April Monetary Policy Committee meeting. Since Korea is not a key currency country, it has limited room to maneuver interest rates, and side effects such as household debt expansion must also be considered. Dongjin Rak, a researcher at Daishin Securities, predicted, "Since financial intermediary loans were used to respond to the novel coronavirus infection (COVID-19), the BOK will cut rates by 25bp at the April Monetary Policy Committee meeting." He added, "After one rate cut, the BOK is expected to implement quantitative easing in the form of directly supplying liquidity or precisely targeting specific regions or industries."

Some also believe that the BOK will engage in quantitative easing by purchasing additional government bonds. The size of deficit bonds to be issued this year will increase due to the government's supplementary budget, which could cause market interest rates to soar and dampen private consumption and investment activities. It is speculated that the BOK will purchase government bonds to block such a buildup effect and adjust the transmission channels of monetary policy.

Meanwhile, betting on the possibility of a BOK rate cut, government bond yields have fallen across the board during the trading session. As of 10:32 a.m. today in the Seoul bond market, the 3-year government bond yield was trading at 1.037%, down 6.9bp from the previous trading day. This is lower than the all-time low closing yield of 1.093% on August 19 last year for the 3-year government bond. In the Seoul foreign exchange market, the won-dollar exchange rate started at 1,187.0 won, down 8.2 won, and has been fluctuating in the high 1,180 won range since then.

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