A Hawkish Han Steps Back as a Monetary Policy Committee Member... Possibility of May Rate Cut

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] Attention is focused on the possibility of an additional interest rate cut by the Bank of Korea's Monetary Policy Committee (MPC) this month. This is because even the MPC members who voted to keep the rate unchanged at the April meeting suggested that the option of a rate cut should be kept open. Members who had previously shown a hawkish (monetary tightening) stance have also gradually displayed a dovish (monetary easing) tendency. Newly appointed MPC members have already indicated a dovish stance, expressing their commitment to revitalizing the economy, which has led the market to watch closely whether an additional rate cut in May is possible.

According to the minutes of the MPC meeting held on the 9th of last month, released by the Bank of Korea, the members who advocated for keeping the base rate unchanged cited the need to assess the policy effects following the recent cut of the base rate to 0.75%. However, members traditionally classified as hawkish or neutral have shifted toward a neutral or dovish stance.

Member A stated, "The global economy could contract significantly until the second half of this year, necessitating additional measures," adding, "If the economic downturn spreads more deeply, the policy rate should be cut to the lower bound if necessary."

There was also a view to operate monetary policy flexibly while monitoring the situation. Member B said, "It is necessary to seek comprehensive countermeasures against various risk factors that may arise from the prolonged COVID-19 pandemic through flexible monetary policy operation in close coordination with fiscal and financial policies."

However, he added, "At the last emergency MPC meeting, a significant cut in the base rate was implemented along with various stabilization measures," and "it is appropriate to closely monitor the effects of these policies along with changes in domestic and international economic and financial conditions." He also said, "Considering that the base rate is already approaching the effective lower bound, preparations for unconventional monetary policy tools should proceed without delay."

Member C said, "To reduce downside risks to the macroeconomy and promote financial market stability, it is necessary to expand the degree of monetary easing," adding, "We need to consider the timing that can maximize the effect of a rate cut."

MPC members who retired at the end of April argued for additional rate cuts, citing risks such as deflation.

Newly appointed MPC members emphasized that the Korean economy is in an unprecedented situation and hinted at the possibility of active monetary policy. MPC member Seo Youngkyung said in her inaugural speech, "Additional policy measures should be considered to ensure smooth liquidity supply to the private sector," adding, "Even if financial market shocks are overcome, the prolonged economic downturn and employment instability may make unprecedented monetary policy the new normal." MPC member Joo Sangyoung also mentioned, "The global economy is in the worst recession since the Great Depression," and stated, "I will do my best to restore economic vitality." Member Cho Yoonje said in his inaugural speech, "Given the extraordinary situation of the domestic and international economy due to the recent COVID-19 pandemic, I feel a heavy responsibility in taking on the role of MPC member."

Ultimately, with the effective lower bound seen by the market nearing, it will be crucial to see how the new and existing MPC members assess the current economic situation. The market considers the effective lower bound of the base rate to be around 0.5%, taking into account that Korea is not a key currency country. Bank of Korea Governor Lee Juyeol said at the April MPC meeting, "It is true that the policy room has decreased as the rate was cut relatively sharply last time," but added, "However, considering that the effective lower bound is variable, there is still room for rate cuts."

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