BOK "0.2% Contraction This Year" ... Additional 0.25%p Interest Rate Cut (Comprehensive)

Consumption, Investment, and Exports All Slump
Negative Growth Expected for the First Time in 11 Years
Interest Rate Lowered to 0.5%...Effectively Zero Interest Rate

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] The Bank of Korea cut its benchmark interest rate again after two months, forecasting a negative annual economic growth rate this year. This decision reflects the assessment that the economic damage caused by the novel coronavirus infection (COVID-19) will be greater and more prolonged than expected. The uncertainty about the timing of economic recovery was reinforced by the fact that not only consumption and investment but also exports, the backbone of the Korean economy, are being shaken. The burden of lowering interest rates was eased as major countries have already implemented near-zero interest rate policies.

On the 28th, the Bank of Korea revised its economic outlook, projecting this year’s growth rate at minus (-0.2%). Until last month, the Bank had expected positive growth this year, but it has now acknowledged that negative growth is inevitable. The Bank of Korea has only twice forecast a negative GDP growth rate before: in April 2009 (-2.4%) and July 2009 (-1.6%), the year following the financial crisis. This is the first negative forecast in 11 years. The Bank also projected this year’s consumer price inflation rate at 0.3%.

Along with this, the Monetary Policy Committee held a meeting to decide the direction of monetary policy and lowered the benchmark interest rate by 25 basis points (1bp=0.01 percentage point) from 0.75% to 0.5% per annum. After cutting the rate by 50bp from 1.25% to 0.75% in March and holding it steady last month, the Bank has now lowered it further. Considering that non-reserve currency countries generally need to maintain rates higher than the U.S. (currently 0%), this effectively brings the rate close to zero.

Bank of Korea Governor Lee Ju-yeol stated, "The domestic economy has significantly slowed down," adding, "Consumption remains sluggish, exports have sharply declined, facility investment recovery is constrained, and construction investment adjustments continue." Compared to last month (when growth was judged to have significantly slowed and exports slightly decreased), the domestic economic situation is viewed as much more severe. He also noted, "Employment conditions worsened, with a significant increase in the decline of employed persons, especially in the service sector," and added, "The domestic economy is expected to continue its sluggish trend for the time being due to the spread of COVID-19." Governor Lee said, "This year’s growth rate is expected to be around 0%, significantly below the February forecast of 2.1%, and the uncertainty surrounding the growth outlook is judged to be very high."

Due to the impact of COVID-19, consumer price inflation is also expected to decline further. Governor Lee explained, "The consumer price inflation rate has dropped sharply to the low single digits due to decreases in petroleum and public service prices and a reduced increase in agricultural, livestock, and fishery product prices," adding, "Core inflation (excluding food and energy) also fell to the low single digits, and general public inflation expectations slightly decreased to the mid-1% range." Furthermore, he forecasted, "Consumer price inflation will be in the low single digits this year due to the decline in international oil prices and weakened upward pressure from the demand side, while core inflation will be in the mid-single digits."

Jo Young-moo, a research fellow at LG Economic Research Institute, said, "Lowering interest rates and injecting money to respond to COVID-19 is a global trend," adding, "Only countries facing severe capital outflows will choose to raise interest rates." There is also an interpretation that the Bank of Korea’s rate cut, combined with the government’s supplementary budget, aims to induce a policymix effect.

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