28th BOK Monetary Policy Committee Meeting... Three Key Points to Watch

Base Rate Decision, Revised Economic Outlook, and Quantitative Easing (QE) Message

[Asia Economy Reporter Eunbyeol Kim] The upcoming Bank of Korea Monetary Policy Committee meeting, just three days away, is attracting unprecedented attention. This is because the base interest rate could be further lowered to an all-time low, and the economic growth forecast for this year is also expected to be significantly revised downward. A key point is whether Governor Lee Ju-yeol will send a message to the market signaling the first step toward quantitative easing (QE). In March, the Bank of Korea implemented a 'big cut' in the base interest rate in response to the impact of the novel coronavirus disease (COVID-19).

According to the Bank of Korea on the 25th, the Monetary Policy Committee will hold a meeting on the 28th to decide the base interest rate and simultaneously announce a revised economic outlook. The most focused aspect is, of course, the base interest rate. In March, the Bank of Korea lowered the base interest rate by 0.5 percentage points from 1.25% to 0.75% per annum.

Experts favoring a rate cut cite economic indicators as their basis. Exports in April decreased by 24.3%, turning the trade balance into a deficit for the first time in 99 months, and export amounts from the 1st to the 20th of this month also fell by 20.3% compared to the same period last year. Given Korea's economic structure, which heavily depends on exports, the economic shock from COVID-19 is expected to last longer. The prolonged low inflation trend, evidenced by the consumer price index rising only 0.1% year-on-year in April, is also cited as a reason for a rate cut. This aligns with the Bank of Korea's goal of price stability.

Recently, the government bond market has also been betting on the possibility of a rate cut by the Bank of Korea. According to the Korea Financial Investment Association, the 3-year government bond yield recorded 0.837% on the 22nd, hitting a historic low.

However, there are opinions that the rate cut should be reserved for July. This is because the base interest rate is already close to the effective lower bound, which is the lowest limit at which non-reserve currency countries can reduce rates. The market estimates the effective lower bound to be around 0.5%, and lowering rates further could lead to foreign investor capital outflows. Yoon Yeo-sam, a researcher at Meritz Securities, said, "Rather than responding to the slowing economic shock, it is positive to focus on liquidity supply policies such as credit provision to struggling households and companies." However, since major countries like the U.S. have already lowered rates to near zero, and some speculate about the introduction of negative interest rates, there are also claims that the effective lower bound could be lower than expected.

Regardless of the rate decision, there is also a possibility that Governor Lee will send a message related to QE to the market. The likelihood of showing a strong commitment to government bond purchases is gaining traction. Since the government plans to finance most of the third supplementary budget through deficit bond issuance, if the Bank of Korea undertakes substantial government bond purchases, it could ease the government's burden. Even if large-scale government bond purchases are not conducted on a regular schedule, non-regular purchases could stabilize interest rates. Whether to introduce a yield curve control policy (managing the spread between short- and long-term interest rates) like Japan is also an important issue. At last month's Monetary Policy Committee press briefing, Governor Lee stated, "We are currently controlling the 3-month maturity rate through full allotment repurchase agreement (RP) purchases," and added, "We will respond with appropriate policy tools according to the development of financial and economic conditions."

Meanwhile, on the same day, the Bank of Korea will revise downward its forecasts for this year's economic growth rate and consumer price inflation. Before the global spread of COVID-19, the Bank of Korea's economic growth forecast released in February was 2.1%, and the consumer price inflation forecast was 1.0%. While major overseas institutions and investment banks expect Korea to experience negative growth this year, the Bank of Korea is likely to maintain a positive growth forecast. The Korea Development Institute (KDI), a government-affiliated research institute, presented an economic growth forecast of 0.2% for Korea on the 20th but warned that if the COVID-19 situation worsens, growth could fall to as low as -1.6%.

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