FOMC: "GDP Gap Expected to Show Largest Negative Swing Since 2000s"

[Asia Economy Reporter Jang Sehee] The Monetary Policy Committee (MPC) of the Bank of Korea expressed a negative view on the economic impact of the spread of the novel coronavirus infection (COVID-19). Furthermore, concerns were raised about the shock to the real economy and the additional decline in expected inflation.

According to the minutes of the 8th regular MPC meeting in 2020 released by the Bank of Korea on the 28th, MPC members emphasized that it may be difficult to accurately gauge the impact of the global spread of COVID-19, and that closely examining the transmission channels and reflecting them in forecasts is necessary to establish effective countermeasures.

The MPC held a meeting on the 9th and decided to maintain the base interest rate at the current level of 0.75% per annum to operate monetary policy. This was to defend against the spread of COVID-19 and the resulting economic shock.

Member A predicted, "Even assuming an optimistic scenario regarding the development of the COVID-19 situation, the GDP gap this year will show the largest negative value since the 2000s." He added, "There are concerns about the resulting shock to the real economy and the additional decline in expected inflation." The GDP gap is the difference between potential GDP and actual GDP, serving as an indicator of economic overheating or recession. A negative GDP gap means demand falls short of supply, indicating increased deflationary pressure.

Member B stated, "If corporate insolvencies and bankruptcies increase, not only will economic recovery take a long time, but changes in demand-supply dynamics will also be inevitable." He added, "Although it is difficult to immediately reflect these risks in economic forecast models, they should be significantly considered as downside risks to our economy."

He also expressed the view that "delayed recovery in advanced countries is the biggest downside risk to our economic outlook," adding, "Going forward, the reduction in global trade volume due to delayed recovery in advanced economies may act as a larger secondary shock to the domestic economy."

Member C said, "With the global spread of COVID-19 and the implementation of movement restrictions in various countries, a global economic recession seems inevitable."

He also noted, "The slowdown in the spread of COVID-19 in China, on which our domestic economy is highly dependent, is evaluated as a positive factor for us," adding, "Since online shopping and delivery systems are relatively well established, the negative impact of COVID-19 on consumption may be buffered."

Regarding interest rates, opinions were expressed that the policy effect should be observed before deciding on a freeze.

Member D said, "It is necessary to prepare countermeasures for each scenario and operate monetary policy flexibly, while seeking comprehensive responses to various risk factors that may arise from the prolonged COVID-19 situation through close cooperation between fiscal and financial policies."

Member E also stated, "In a crisis situation like now, active monetary policy to respond to the crisis is important, but at present, it is necessary to observe the effects of the measures we have taken so far a bit longer."

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