[Economic Outlook] Announcement of the 'Korean New Deal' Plan... Bank of Korea Likely to Keep Base Interest Rate Unchanged

[Image source=Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] This week, the government will announce a comprehensive plan for the 'Korean New Deal' to recover the economy hit by the novel coronavirus disease (COVID-19). Attention is also focused on whether the Bank of Korea will keep the base interest rate unchanged considering the excess liquidity in the market or lower it further reflecting the economic downturn.

President Moon Jae-in is scheduled to announce the comprehensive plan for the Korean New Deal on the 14th. Previously, the government set a goal to dramatically expand the data, network, and artificial intelligence (AI) ecosystem, install Wi-Fi in elementary, middle, and high school classrooms to build remote education and non-face-to-face medical infrastructure, and create 550,000 sustainable jobs in the process of converting old public rental housing and other infrastructure to green.

The comprehensive plan for the Korean New Deal is expected to include a Green New Deal policy that establishes a foundation for the expansion of renewable energy industries such as solar power and hydrogen. The government aims to invest 12.9 trillion won in the Green New Deal policy by 2022 to create 133,000 jobs.

The employment trend statistics to be announced by the Statistics Korea on the 15th are also drawing attention. These statistics will reveal the extent of the shock to the employment market caused by the spread of COVID-19. According to the employment trend announced a month ago for May, the number of employed persons was 26.93 million, down 392,000 from a year earlier. This marks the third consecutive month of decline following March (-195,000) and April (-476,000). The three-month consecutive decrease in the number of employed persons is the first since the global financial crisis period from October 2009 to January 2010 (four consecutive months).

The number of unemployed increased by 133,000 to 1.278 million, and the unemployment rate rose by 0.5 percentage points to 4.5%. Both the number of unemployed and the unemployment rate were the highest since the statistics began to be compiled in 1999 for the same month.

[Image source=Yonhap News]

The Bank of Korea is likely to keep the base interest rate at 0.50% per annum, considering that the economy is still deteriorating. However, given the excess liquidity in the market and the already low base interest rate, it seems difficult to lower it further. Although the economic situation due to COVID-19 has not particularly improved, the financial market is not especially unstable, and the overheating of the real estate market due to abundant liquidity must also be considered. Around the time of the government's high-intensity real estate measures last month, apartment prices in Seoul showed a sharp rise. Although this was a concentration phenomenon ahead of the policy, it is also analyzed that the lowered interest rate had an impact. On May 28, the Bank of Korea's Monetary Policy Committee lowered the base interest rate by 0.25 percentage points from 0.75% to 0.5% per annum.

Gong Dong-rak, a researcher at Daishin Securities, said, "This Monetary Policy Committee meeting will be a boring one as there are hardly any issues or controversies," and evaluated, "The base interest rate has practically been lowered to a level where it is difficult to reduce it further."

He added, "If the base interest rate is lowered by 0.25 percentage points each time, there is little room to lower it further unless the U.S. Federal Reserve (Fed) lowers the federal funds rate (0.00?0.25%), which is the base interest rate, further."

Yoon Yeo-sam, a researcher at Meritz Securities, predicted a rate cut, saying, "Although the low inflation is somewhat unsettling, as Governor Lee said, it is a process of passing the bottom, and even if the rate is lowered further, it is not a situation that could stimulate inflation."

Earlier, on the 15th, the Bank of Korea's 'May Monetary and Liquidity' statistics will also be announced. As of the end of April, the broad money supply (M2) was 3,018.6 trillion won, surpassing 3,000 trillion won for the first time ever. M2 includes cash, demand deposits, and checking deposits (M1), as well as money market funds (MMF), time deposits and savings deposits under two years, beneficiary certificates, certificates of deposit (CD), repurchase agreements (RP), financial bonds under two years, and money trusts under two years, which are short-term financial products that can be quickly converted into cash. In April alone, it increased by 34 trillion won (1.1%), which was practically the largest monthly increase ever based on the current M2 standard.

A special purpose vehicle (SPV) to support partner companies in key industries will also be established next week and begin full operation. The organization will support companies by purchasing loan claims of partner companies from commercial banks and issuing securitized bonds (P-CLO). This program is specialized for partner companies with low credit ratings and limited access to finance. The government plans to supply a total of 5 trillion won in operating funds loans through the organization.

The corporate asset disposal support program, operated mainly by the Korea Asset Management Corporation (KAMCO), will also start operating from next week. KAMCO has completed a preliminary demand survey and will receive corporate applications from next week after preparing support criteria.

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