Bank of Korea May Cut Interest Rates as Early as Today... Countdown to 0% Interest Rate

Could Fall to 0.75%... First Time Ever in the 0% Range

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea is increasingly likely to cut interest rates sooner than expected. This is because the U.S. central bank, the Federal Reserve (Fed), has abruptly lowered its benchmark interest rate to near 'zero interest rate' levels, eliminating the possibility for the Bank of Korea to delay further rate cuts.

According to the Bank of Korea and bond market sources on the 16th, the Bank of Korea is expected to hold an emergency Monetary Policy Committee (MPC) meeting soon to lower interest rates. The rate adjustment is also likely to be around 50 basis points (bp) (1bp = 0.01 percentage points). If a 50bp cut is implemented, the benchmark interest rate will fall from 1.25% per annum to 0.75% per annum, marking the first time the rate enters the 0% range in history.

Initially, the Bank of Korea was expected to hold an emergency MPC meeting around the 17th or 18th to cut rates in response to the economic shock caused by the COVID-19 pandemic. Since the supplementary budget bill (추경) was expected to pass in the National Assembly on the 17th, it was necessary to implement the rate cut alongside the budget approval to show coordinated efforts between fiscal and monetary authorities.

However, since the Fed made another 'big cut' two days ahead of the scheduled regular Federal Open Market Committee (FOMC) meeting on the 17th-18th (local time), the Bank of Korea's justification for hesitation has weakened.

The Bank of Korea had already officially hinted at the possibility of holding an emergency MPC meeting on the 13th. On that day, the Bank of Korea stated, "Discussions are currently underway among MPC members regarding the necessity of holding an emergency MPC meeting." Notably, on the same day the Bank of Korea hinted at the emergency MPC, Governor Lee Ju-yeol visited the Blue House to attend a special economic and financial situation review meeting on COVID-19 chaired by President Moon Jae-in. This was the first time Governor Lee attended an economic ministry meeting presided over by the president. Given his unusual attendance, it is widely believed that coordination between fiscal and monetary policies was discussed.

As expectations for a rate cut by the Bank of Korea grew, government bond yields fell across the board that day. As of 9:35 a.m. in the Seoul bond market, the yield on 3-year government bonds dropped 8.0bp from the previous trading day to 1.069% per annum.

The Bank of Korea Act stipulates that an emergency MPC meeting can be convened upon the request of the chairman or two or more MPC members.

The Bank of Korea has only held emergency MPC meetings to cut rates twice before: in September 2001 (50bp cut) right after the 9/11 terrorist attacks, and in October 2008 (75bp cut) during the financial crisis. However, considering that South Korea is not a key currency country and there are concerns about capital outflows from a sharp rate cut, as well as the need to preserve room for additional policy measures, the Bank of Korea may limit the cut to 25bp. The Bank of Korea has been cautious about rate cuts due to concerns that the effect of lowering the benchmark rate may be minimal and that it could stimulate real estate prices in regions with weak regulations.

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