Bank of Korea Lowers Growth Rate on 27th... Possibility of Keeping Base Rate Unchanged

Growth Rate Forecast Revised Downward from -0.2% to Around -1%
Announced with 3 Scenarios, Worst Case Scenario Could Reach Around -2%

Base Interest Rate Expected to Remain at Record Low
0.5% per Year... Maintaining Accommodative Monetary Policy

[Asia Economy Reporter Kim Eunbyeol] As the novel coronavirus infection (COVID-19) is rapidly spreading again in South Korea, making economic damage inevitable, the Bank of Korea is highly likely to keep the base interest rate at the historically lowest level (annual 0.50%) at the Monetary Policy Committee meeting on the 27th. The economic growth rate forecast is also expected to be significantly lowered from the previous -0.2% to around -1%. In the worst-case scenario, the growth rate forecast could drop to the -2% range.

According to economic experts on the 23rd, the Bank of Korea is likely to maintain the base interest rate at 0.50% at the Monetary Policy Committee meeting on the 27th. Given the growing concerns over the resurgence of COVID-19, a accommodative monetary policy will be maintained, but since a second global resurgence may begin this fall, the possibility of further rate cuts is likely to be reserved.

Currently, the Bank of Korea's base interest rate is considered to be close to the effective lower bound. The effective lower bound of the base interest rate refers to the stage where lowering the base rate below the lower limit increases the risk of side effects such as asset bubbles in real estate and capital flight by foreigners.

Earlier, in March, as COVID-19 spread worldwide and markets fluctuated, the Bank of Korea lowered the base interest rate from 1.25% to 0.75%, and further cut it to 0.50% in May. Since then, the rate was held steady at the July Monetary Policy Committee meeting.

On the same day as the interest rate decision on the 27th, the Bank of Korea will also revise and release this year's growth rate forecast for South Korea. The Bank of Korea's Research Department plans to monitor the domestic spread of COVID-19 until this weekend and finalize the growth rate forecast by reflecting the results. Since the situation changes rapidly every day, they aim to improve the accuracy of the growth rate forecast by incorporating the latest information until the last moment.

Given the current situation, the Bank of Korea's growth rate forecast is inevitably expected to be revised downward. In the economic outlook in May, the Bank of Korea forecasted growth assuming that COVID-19 would subside in the second half of the year, but recently, daily confirmed cases have exceeded 300.

In this economic outlook, the Bank of Korea is expected to present three scenarios regarding the extent of COVID-19 spread, similar to May. The baseline scenario is likely to show a growth rate in the -1% range. Previously, in the May forecast, the worst-case scenario was -1.8%, and the baseline scenario was -0.2%. However, since the domestic economy is highly dependent on exports and the current export slump is showing signs of improvement, the forecast may be presented around -0.8%, similar to the Organization for Economic Cooperation and Development (OECD) forecast. The average growth rate forecast for South Korea this year by nine foreign investment banks (IBs) as of the end of July, compiled by the International Financial Center, is also -0.8%.

Professor Sung Tae-yoon of Yonsei University’s Department of Economics said, "Considering the COVID-19 situation, the Bank of Korea will have to significantly lower its forecast," but added, "However, since this would weaken the rationale for keeping the interest rate unchanged, it is likely that the forecast will be presented somewhat higher than expected."

According to internal analysis by the Bank of Korea, to maintain even a growth rate around -1% this year, the quarter-on-quarter growth rates for the third and fourth quarters must be at least about 1.8% each. This means that the economy must succeed in rebounding close to 2% in the third and fourth quarters to defend against a contraction and keep the decline to around -1%.

The government is placing its hopes on exports as the only way to boost growth for the remainder of the year. Although July exports decreased by 7% compared to the same period last year, the rate of decline fell to single digits for the first time in four months. The decline has been narrowing from April (-25.5%), May (-23.6%), and June (-10.9%).

However, looking at customs clearance data by item and export destination, it is difficult to say the recovery has been significant, and these factors are expected to act as variables. Experts particularly express concern over the decline in automobile exports and the weaker-than-expected recovery in exports to China. Professor Kang In-soo of Sookmyung Women's University’s Department of Economics explained, "It is disappointing that exports to China have remained flat, and there is a possibility that the U.S. may impose lockdown measures again." He added, "By industry, it is difficult to find any sector other than semiconductors that can be expected to rebound significantly." The relatively slow pace of China's economic recovery, compared to the Chinese government's claims, is also a negative factor when considering exports to China. The rapid spread of COVID-19 domestically and the potential strengthening of social distancing measures are also worrisome factors. If both exports and domestic demand contract simultaneously, this year’s growth rate could ultimately realize the worst-case scenario.

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