BOK "This Year's Growth Rate Will Fall Below May Forecast (-0.2%)" (Comprehensive)

Bank of Korea Holds Base Interest Rate Steady at 0.50% per Annum

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] The Bank of Korea on the 16th kept the base interest rate steady at 0.50% per annum and forecasted that this year's economic growth rate would fall short of the previously projected -0.2%. Although domestic consumption has somewhat revived, the decline in exports and other factors have slowed the pace of economic recovery. The sluggish employment situation was also cited as a reason why this year's growth rate is likely to fall below expectations.

The Monetary Policy Board of the Bank of Korea held a meeting on the 16th, chaired by Governor Lee Ju-yeol, and decided to maintain the base interest rate at 0.50% per annum. At the Monetary Policy Board meeting on May 28, the Bank had lowered the base rate from 0.75% to the historic low of 0.5%. This decision is interpreted as a move to maintain a low interest rate stance for the time being amid delayed economic recovery in the second half due to COVID-19 and increasing uncertainties in external factors, while monitoring the situation.

In the monetary policy direction statement, the Board noted, "While restrictions on economic activities have eased and private consumption rebounded supported by government measures, export declines and adjustments in construction investment continued," adding, "Facility investment recovery was also constrained, resulting in a continued sluggish trend." It also reported that the employment situation remained weak with a significant decrease in the number of employed persons. Furthermore, it stated, "Going forward, facility and construction investments are expected to show a gradual improvement, but the recovery of consumption and exports is anticipated to be somewhat slower than initially projected," and added, "This year’s growth rate is expected to fall short of the May forecast (-0.2%)."

The consumer price inflation rate and core inflation rate are expected to remain in the low 0% range. This is a downward revision from the May monetary policy statement, which had forecasted consumer price inflation in the low 0% range and core inflation in the mid 0% range. The decline in international oil prices and low inflationary pressure from the demand side were cited as causes.

However, concerns were raised that the overflowing liquidity is only inflating asset prices such as real estate, and due to the effective lower bound, the Bank of Korea could not lower the base interest rate further.

On the day, the Bank expressed concerns about the recent rise in housing prices and the sharp increase in household loans. The statement noted, "Household loans have expanded significantly compared to the previous month, and housing prices have risen in both the metropolitan area and provinces."

The Bank’s decision to keep the rate unchanged also reflects a policy mix dimension related to the government’s real estate stabilization policy. On the 10th, Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki indirectly remarked during the announcement of real estate measures that the Bank of Korea’s rate cuts had influenced the rapid rise in real estate prices and that further cuts should be avoided. Another factor for maintaining the rate is to observe the effects of policies such as the execution of the third supplementary budget. However, the Bank is closely monitoring the possibility that the issuance of deficit government bonds due to the supplementary budget could push up government bond yields. Governor Lee stated after the May Monetary Policy Board meeting, "We are closely watching the possibility of market instability if a large amount of government bonds is issued," and added, "If long-term interest rates fluctuate, we will actively purchase government bonds to stabilize the market."

Professor So-Young Kim of Seoul National University’s Department of Economics said, "As COVID-19 prolongs, export, investment, and employment indicators are all worsening," and added, "Downward pressure on the economy is increasing, making it inevitable for the Bank of Korea to revise downward its initial growth forecast of -0.2%."

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