FOMC: "COVID-19 Poses Significant Downward Pressure on Economy... Risk of Deflation"

Prolonged Total Demand Contraction Raises 'Deflation Risk'

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The Bank of Korea's Monetary Policy Committee (MPC), which convened an emergency meeting for the first time since the 2008 global financial crisis to cut the base interest rate, analyzed that economic damage due to the spread of COVID-19 is inevitable. Additionally, concerns about deflation were raised.

According to the 'Minutes of the 6th MPC (Emergency) Meeting in 2020' released by the Bank of Korea on the 31st, MPC members advised that as COVID-19 spreads worldwide, a vicious cycle linkage between the real economy and financial markets continues, and active response is necessary.

The MPC convened an emergency meeting on the 16th and lowered the interest rate by 0.50 percentage points to 0.75% in response to the growing economic shock caused by the spread of COVID-19.

Member A emphasized, "Due to the psychological contraction of economic agents, the vicious cycle linkage between the real economy and financial markets interacts, and the extreme possibility of undermining the stability of the financial system, as seen during the global financial crisis, cannot be completely ruled out."

He added, "Lowering the base interest rate to an all-time low in the 0% range is expected to have a positive stimulus effect on the real economy, such as growth and inflation, by reducing borrowing costs for households and companies."

Member B warned of the risk of deflation along with the economic vicious cycle.

Member B stated, "The COVID-19 situation is expanding not only as a micro and sectoral shock but also as a macro and aggregate demand shock. If the contraction of aggregate demand prolongs, there is an increasing concern that the structural inflation of our economy, which has already been at a low level, will decrease further, heightening the risk of deflation."

Member C said, "The economic ripple effects of COVID-19 are expected to be larger and last longer than previously forecasted. Domestically, it is judged to be a very important time to maximize conditions that allow our companies to minimize losses in their production capacity and overcome the current situation, along with the expanding social safety net and financial support for self-employed individuals."

Member D mentioned, "Due to the still high uncertainty of COVID-19 itself, anxiety in global financial markets is intensifying, and the instability of the global financial system is increasing. The increased volatility of global asset prices caused by the expansion of anxiety in global financial markets is also negatively affecting the domestic financial market."

Member Lim Ji-won, who expressed a minority opinion at the emergency MPC meeting that the base interest rate should be lowered by 0.25 percentage points, emphasized the need to reserve policy room.

Member Lim said, "While it is necessary to operate monetary policy in a accommodative manner, if concerns about a global economic recession intensify significantly, it seems preferable to adjust gradually rather than rapidly depleting traditional monetary policy capacity."

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