US Emergency Measures... Lee Ju-yeol, Governor of Bank of Korea, Hints at Possible Interest Rate Cut (Comprehensive)

"Considering Changes in Policy Conditions Such as US Interest Rate Cuts and COVID-19 Spread"
"Somewhat Expanded Scope of Monetary Policy Operation"
"Monetary Policy Should Consider Harmony with Government Policies"

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] Lee Ju-yeol, Governor of the Bank of Korea, hinted at the possibility of a rate cut on the 4th.

Just over a week after the Bank of Korea (BOK) kept interest rates unchanged on the 27th of last month, the new coronavirus infection (COVID-19) spread worldwide, and the United States made an emergency rate cut, leaving room for a rate cut reflecting such circumstances. At the time of the rate freeze, the BOK was cautious, saying that the side effects of a rate cut should also be considered.

On the 4th, Governor Lee held an emergency executive meeting and said regarding the U.S. rate cut, "It is necessary to operate monetary policy in the future by appropriately considering changes in policy conditions."

Earlier, on the 3rd (local time), the U.S. Federal Reserve (Fed) held an emergency Federal Open Market Committee (FOMC) meeting and abruptly cut the benchmark interest rate by 50 basis points (1bp=0.01 percentage point). As the Fed sharply lowered rates and the inversion gap with Korea’s benchmark interest rate (annual 1.25%) was resolved, there was analysis that the BOK might soon cut its benchmark rate as well.

Governor Lee explained, "With this measure by the U.S. Fed, the U.S. policy rate (1.00?1.25%) has been lowered to a level similar to the domestic benchmark rate (1.25%)," and said he would consider such changes in conditions. He also cited ▲the rapid global spread of COVID-19 since late last week, raising concerns about the global economic situation, and ▲the G7 governors and finance ministers’ decision to strengthen policy coordination as factors indicating changes in policy conditions.

In a Q&A session with reporters after the meeting, he said, "If viewed only from the perspective of concerns about capital outflows, it is true that the scope of future monetary policy operations has somewhat widened," but added, "However, the effective lower bound is not estimated solely by considering capital outflows; it can also be evaluated from various aspects such as the real economy’s ripple effects and side effects on financial stability."

[Image source=Yonhap News]

He maintained the position that there are limits to resolving the ripple effects of COVID-19 solely through rate cuts. Governor Lee added, "In this process, coordination with government policies must be considered." The "coordination with government policies" mentioned by the governor has various interpretations. It can be read as meaning that synergy can be created by aligning the timing of the supplementary budget execution and the rate cut. The market expects that the BOK may hold an emergency Monetary Policy Committee meeting this month and implement a rate cut. The BOK previously held an emergency MPC meeting during the 2008 financial crisis and cut rates by 75 basis points.

Governor Lee also mentioned the possibility that the Fed might cut rates once more. He said, "The prevailing view in the market is that an additional 25bp rate cut will be made at the March FOMC," and "It is expected that the Fed will decide on additional rate cuts and the extent of cuts in consideration of the spread of COVID-19 and its economic impact."

Regarding the Fed’s surprise rate cut, he viewed it as focused on easing volatility in the international financial markets. Governor Lee said, "Although the impact of COVID-19 has not yet been reflected in major U.S. economic indicators, the financial market showed very unstable signs such as a sharp drop in government bond yields and stock prices, so it seems that the Fed aimed to stabilize the market through a rate cut." He also interpreted that the Fed needed to take the lead in major country policy coordination as per the G7 finance ministers and central bank governors’ meeting.

[Image source=Reuters Yonhap News]

Some speculate that the BOK will engage in quantitative easing by purchasing additional government bonds in the future. The scale of deficit government bonds to be issued this year will increase due to the government’s supplementary budget, and if this happens, market interest rates could soar, dampening private consumption and investment activities. It is expected that the BOK will purchase government bonds to block such a portfolio balance channel effect and adjust the transmission path of monetary policy.

In response, Governor Lee said, "It is true that the issuance of deficit government bonds for the COVID-19 response supplementary budget will expand bond supply and act as a factor raising market interest rates," but he judged, "If deficit government bonds are issued in a dispersed manner, the burden of supply expansion can be alleviated, and considering that recent demand for treasury bonds has been solidly supported, it may partially act as upward pressure on interest rates but will have almost no portfolio balance channel effect on corporate bonds, etc."

He added, "If the increase in treasury bond issuance leads to expanded interest rate volatility, simple purchases of treasury bonds can be considered for market stabilization purposes."

Meanwhile, on the same day, treasury bond yields showed a sharp decline amid expectations that the BOK might also implement a rate cut. According to the Korea Financial Investment Association, the 3-year treasury bond yield closed at a record low of 1.029%, down 8.1 basis points from the previous day. This is 6.4 basis points lower than the previous record low of 1.093% on August 19 last year. In the Seoul foreign exchange market, the won-dollar exchange rate closed at 1,187.8 won, down 7.4 won from the previous day.

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