BOK Releases February Monetary Policy Meeting Minutes... Two Dovish Members Advocating Rate Cuts, Concerns Over Low Inflation

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[Asia Economy Reporter Kim Eunbyeol] At the Monetary Policy Committee meeting in February, when the Bank of Korea decided to keep the base interest rate unchanged, it was revealed that the committee considered the duration of the COVID-19 pandemic to be uncertain. Two dovish members advocated for a rate cut, but the majority preferred to maintain the rate while monitoring the COVID-19 situation. Until the end of February, most members placed greater importance on financial stability, including the real estate market.

According to the minutes of the Monetary Policy Committee meeting held on February 27, released by the Bank of Korea on the 17th, the interest rate was kept steady with an emphasis on the importance of financial stability. Instead, measures were taken to expand financial intermediation support loans. The dovish members argued for a rate cut based on low inflation.

One member who submitted a minority opinion for a rate cut expressed concern, stating, "Facing the disaster of COVID-19, a sharp contraction in domestic demand such as consumption in the first quarter is inevitable." He added, "Even if this year’s growth rate remains at last year’s level as projected by the research department, the largest negative output gap since the global financial crisis is expected to be recorded." Assuming the economy grows along the forecast path, a negative GDP gap is expected, so considering the impact of COVID-19, the member argued that lowering the interest rate is even more necessary.

Another member worried that if the COVID-19 shock prolongs, it would become even more difficult to reverse the downward trend in inflation. He emphasized, "It would be desirable to operate monetary policy by lowering the base rate from the current 1.25% to 1.00% to support the recovery of our economy and thereby allow the underlying inflation rate to gradually converge to the target level."

However, the remaining members advocated for keeping the rate unchanged, emphasizing financial stability.

One member argued for the freeze, stating, "Given the side effects of prolonged accommodative monetary policy, the accumulation of financial imbalances has expanded not only in our country but also in most advanced economies, so reconsidering the aforementioned dynamic trade-off is very important."

Additionally, it was pointed out that liquidity in the financial market is at a level sufficient to support the real economy, and that exposure related to real estate is high. The possibility that the effect of the government’s real estate measures on slowing household debt might appear more slowly than expected was also cited as a reason to keep the interest rate unchanged.

Furthermore, the Monetary Policy Committee members viewed that support policies focused on sectors struggling due to COVID-19 would be more effective. Accordingly, the Bank of Korea expanded the scale of financial intermediation support loans by 5 trillion won.

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