Lee Ju-yeol "Now is the right time for interest rate cuts... Effects will appear with a time lag"

Bank of Korea Holds Emergency Monetary Policy Committee Meeting for the First Time in 12 Years
Lee Ju-yeol: "Impact of COVID-19 Greater and Faster Than Expected... Difficult to Achieve Growth Rate Forecast"

[Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] On the 16th, Lee Ju-yeol, Governor of the Bank of Korea, stated after lowering the base interest rate, "The timing for the rate cut is much more appropriate now." Although there were concerns about a missed opportunity after the Bank of Korea kept the rate unchanged on the 27th of last month, he explained that with the supplementary budget bill (추경) about to pass in the National Assembly and the global monetary policy coordination atmosphere forming, now is a time when the effect of a rate cut would be greater.

At a press conference held immediately after the emergency Monetary Policy Committee meeting at the Bank of Korea headquarters in Jung-gu, Seoul, Governor Lee said, "Even now, I believe that keeping the base rate unchanged in February was an appropriate measure," adding, "In a situation where confirmed cases of the novel coronavirus infection (COVID-19) continue to rise, micro and selective measures addressing difficulties in vulnerable sectors were more effective than lowering interest rates, and if we had cut rates then, it would have had almost no impact on the market."

On the same day, the Bank of Korea held an emergency Monetary Policy Committee meeting and abruptly cut the base interest rate from the existing 1.25% per annum to 0.75%, a 0.5 percentage point reduction. This significant cut was made to minimize the economic damage caused by COVID-19. As a result, the base rate dropped sharply into the 0% range. The Bank of Korea is treading "uncharted territory." This decision will take effect from the 17th.

The Bank of Korea's sudden rate cut is also interpreted as a serious assessment of the economic damage caused by COVID-19. Governor Lee explained, "As the speed and intensity of COVID-19's spread were greater and much faster than initially expected, spreading to many regions, we anticipated the impact would be prolonged. To help vulnerable sectors such as small business owners and small and medium-sized enterprises overcome difficulties, we decided to respond actively by significantly lowering their borrowing costs."

He predicted that the growth rate forecast for this year (2.1%) announced at last month's Monetary Policy Committee meeting would not be achieved. Governor Lee added, "It is currently neither possible nor meaningful to forecast the exact figure."

He further explained, "Forecasting is only possible if it is assumed when the COVID-19 outbreak will subside globally, so it is impossible to present specific figures," adding, "The risk of the growth rate falling below the previous forecast has significantly increased."

He also mentioned that the Bank of Korea's decision was influenced by the U.S. Federal Reserve (Fed) cutting interest rates by 150 basis points (1bp = 0.01 percentage points) within a few days and adopting a zero interest rate policy.

Leading the way, major central banks including the European Central Bank (ECB), Bank of England (BOE), Japan, and China have implemented monetary easing measures in coordination, but financial market volatility remains high. Governor Lee attributed this to COVID-19 being a health crisis. He said, "There is a recognition that monetary policy has limitations in a health crisis," explaining, "It is true that conditions restrict the effectiveness of interest rate adjustments."

However, he predicted that the rate cut would have some effect in calming financial market anxiety, and if confidence grows that the spread of COVID-19 will subside, the effects of monetary policy could appear with a time lag.

Regarding concerns that the rate cut might cause a concentration in the real estate market, he said, "In the short term, global economic contraction has increased, and the domestic real economy is being hit, so it is unlikely that real estate prices will continue to rise."

He added, "Of course, if economic activities return to normal, I am not saying there is no concern about what might happen then, but considering various conditions, the short-term upward trend in housing prices is expected to be limited."

On the possibility of further rate cuts, he avoided a direct answer, saying, "It is difficult to lower rates below the effective lower bound, but the effective lower bound is quite variable depending on changes in domestic and international financial market conditions and changes in major countries' policy rates," adding, "The Bank of Korea is prepared to respond appropriately using all available measures in response to these changes." The next regular Monetary Policy Committee meeting is scheduled to be held as planned on April 9.

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