The Bank of Korea to Downgrade Growth Rate by Month-End... Possibility of Additional Interest Rate Cuts

Interest Rate Decision and Revised Economic Outlook on the 28th
Reflecting the COVID-19 Pandemic and Global Economic Deterioration

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] As the shock of the novel coronavirus infection (COVID-19) prolongs, the Bank of Korea (BOK) is expected to significantly lower its growth rate forecast at the end of this month. In particular, following February, the domestic COVID-19 spread situation in May remains uncertain, prompting the BOK’s Economic Statistics Department, which announces the growth rate forecast, to closely monitor the COVID-19 situation. It is anticipated that the global economic recovery will take more time than expected, and the possibility of a rate cut at the end of this month is gradually increasing.

According to the BOK on the 17th, the Bank will revise downward its growth rate forecast through the revised economic outlook on the 28th. In February, the BOK had projected this year’s economic growth rate at 2.1%. That forecast was made under the assumption that COVID-19 would not spread globally, but the situation has changed significantly. Now, institutions such as the International Monetary Fund (IMF) forecast Korea’s growth rate this year at -1.2%, and the global economic growth rate is expected to contract by -3%, with several organizations successively adjusting their growth rate forecasts.

However, it is unlikely that a negative growth rate will be forecast. Since it is only May, there remains the possibility of an economic rebound in the second half of the year. On April 9, BOK Governor Lee Ju-yeol also left open the possibility that Korea’s growth rate could fall to the 0% range this year but did not expect it to drop into negative territory. Assuming COVID-19 shows signs of containment and the economy rebounds, growth in the 0% range can be expected.

Researcher Kang Seungwon of NH Investment & Securities said, "With recent export indicators deteriorating, the BOK will have no choice but to significantly lower this year’s growth rate forecast when it releases the revised economic outlook this month."

On the same day, the possibility of a rate cut is also increasing. Recently, in the domestic bond market, the possibility of a rate cut has been reflected, causing government bond yields to decline. As of the 15th, the 3-year government bond yield was 0.87% per annum, and the 10-year government bond yield was 1.38% per annum, down 0.13 percentage points and 0.14 percentage points respectively from the end of last month. The 3-year government bond yield recorded an all-time low of 0.86% per annum on the 13th.

Foreign investors have steadily purchased domestic bonds in both the spot and futures markets, supporting the decline in yields. As of the end of last month, foreign holdings of domestic listed bonds reached a record high of 140.5 trillion KRW.

Researcher Koo Hyeyoung of Mirae Asset Daewoo said, "At the April Monetary Policy Committee (MPC) meeting, it was forecast that if the COVID-19 spread subsides in the second quarter and economic activity improves in the third quarter, growth in the 0% range would be possible this year. However, the uncertainty of the global economy and the risk of prolonged low inflation have increased compared to then," predicting a rate cut this month.

However, the current base rate is 0.75%, and considering that Korea is not a key currency country, the effective lower bound for rate cuts is approaching, which could be a burden. Even if the rate is cut once more by 0.25 percentage points to 0.5%, it would reach the effective lower bound level mentioned in the market, and quantitative easing (QE) policies might have to be used instead of rate cuts going forward.

Some speculate that regardless of a rate cut, the BOK may unveil additional policy measures such as large-scale government bond purchases to respond to the economy and stabilize the market. This is because financial market stability and maintaining a low interest rate environment are essential to maximize the effects of the fiscal policies being implemented by the government.

Researcher Lee Miseon of Hana Financial Investment said, "This is not about the purpose of quantitative easing (QE) to artificially lower long-term interest rates, but a situation that requires more aggressive government bond purchase measures to stabilize the bond market."

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