[Economic Outlook] Will the Bank of Korea Lower the Base Rate Again... Last Month's Industrial Production and Business Sentiment Indicators Also Released

[Image source=Yonhap News]

[Asia Economy Reporter Kim Hyun-jung] Attention is focused on whether the Bank of Korea will cut the base interest rate ahead of this week’s Monetary Policy Committee meeting. Industrial production and business sentiment indicators, which will reveal the extent to which the COVID-19 pandemic has affected the domestic economy, are also scheduled to be released consecutively.

The Bank of Korea will hold its Monetary Policy Committee meeting on the 28th to decide whether to adjust the base interest rate. Experts believe there is a high possibility that the Bank of Korea will lower the base rate from 0.75% to 0.5% per annum on that day. Even if the rate is not cut this month, it is widely expected that the base rate will be further reduced at the July meeting. This outlook is further reinforced by the worsening economic conditions compared to March, including a sharp decline in exports and negative growth in the first quarter. The Korea Development Institute (KDI), a government-affiliated research institute, also emphasized the need for a rate cut last week. KDI officially stated that in response to the economic downturn and downward pressure caused by COVID-19, the Bank of Korea should lower the base rate as quickly as possible to near 0%, and additionally employ unconventional monetary policy tools such as purchasing government bonds.

The Bank of Korea will also release a revised economic outlook after the Monetary Policy Committee meeting on the same day. In February, the Bank had lowered its growth forecast for this year from 2.3% to 2.1%. However, given the further deterioration of the economy due to COVID-19, there are expectations that the growth rate will be significantly lowered to around 0%.

On the 29th, Statistics Korea will announce the industrial activity trends for April. In the March survey, service sector production plummeted by 4.4%, marking the largest decline since the related statistics began being compiled in 2000. This followed a 3.5% decrease in February, resulting in two consecutive months of contraction. Conversely, manufacturing production increased by 4.6%. Retail sales fell by 1.0%.

The leading index’s cyclical component, which indicates future economic conditions, also recorded its largest drop in 12 years and 1 month, significantly worsening the economic outlook.

On the 26th, the Bank of Korea will release the results of the May Business Survey Index (BSI) and Economic Sentiment Index (ESI), which gauge corporate sentiment. The BSI for all industries in April fell by 3 points from the previous month to 51, a level comparable to December 2008 during the global financial crisis.

The Business Survey Index measures business owners’ assessments and outlooks on current business conditions. If the number of respondents with a negative view exceeds those with a positive view, the index falls below 100. The lower the figure, the worse the business sentiment.

The second round of emergency loans for small business owners is expected to be implemented as early as late next week. These emergency loans provide low-interest liquidity funds to small business owners affected by the COVID-19 crisis. Commercial banks began reviewing pre-applications received from the 18th starting on the 25th. Since the second loan involves both lending and guarantees through banks, loan amounts are expected to be deposited into applicants’ accounts as early as the 28th or 29th.

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