Lee Ju-yeol "Uncertainty Rises Due to COVID Resurgence... Maintaining Accommodative Monetary Policy"

Bank of Korea Report to the National Assembly's Planning and Finance Committee

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] Lee Ju-yeol, Governor of the Bank of Korea, stated on the 24th, "As the domestic spread of the novel coronavirus infection (COVID-19) is expanding again, the uncertainty of the future economic flow has increased significantly." Accordingly, he also indicated his intention to maintain a accommodative monetary policy stance.

Governor Lee attended the National Assembly's Planning and Finance Committee briefing on the same day and said, "Although the domestic economy, which had deteriorated significantly due to the spread of COVID-19, showed signs of some improvement, the recent resurgence of COVID-19 is expected to weaken the recovery trend."

Regarding the global economy, he diagnosed that economic activity had gradually resumed since May, somewhat alleviating the downturn, but the spread of COVID-19 has not been easily contained, so the uncertainty of the global economy remains high.

The domestic economy had worsened significantly at the early stage of the COVID-19 spread but showed signs of some improvement as export and consumption slumps eased. Exports were gradually recovering in the third quarter as major countries resumed economic activities, and consumption rebounded supported by government aid measures. However, with the recent resurgence of domestic COVID-19 infections, the expected economic recovery is unlikely to materialize. In May, the Bank of Korea projected this year's economic growth rate at -0.2%, but it is expected to revise the growth forecast downward on the 27th. Some predict that in the worst case, the growth rate could fall to -2.0%.

Governor Lee also gave a negative assessment of the employment situation. He said, "Since March, the number of employed persons has sharply decreased, especially in the service sector with a high proportion of face-to-face operations," and added, "Employment improvement in industries severely affected by the COVID-19 shock is slow, and with continued sluggishness in manufacturing and construction sectors, the employment situation is expected to show a weak trend going forward."

Therefore, Governor Lee stated, "We plan to operate an accommodative monetary policy to support the recovery of the domestic economy," and added, "In this process, we will closely examine the impact of the COVID-19 developments on finance and the economy, as well as the ripple effects of the policy responses so far." However, experts weigh that the benchmark interest rate, at a historic low of 0.50%, is likely to remain unchanged for the time being. This is because it is necessary to keep room for response in case of a global resurgence of COVID-19.

Since the beginning of this year, the Bank of Korea has introduced unprecedented levels of various policy measures to respond to the COVID-19 crisis. The benchmark interest rate, which was around 1.25% before the spread of COVID-19, was lowered to a historic low of 0.50% per annum, and monetary policy was operated more accommodatively by increasing the limit on financial intermediary support loans to assist small and medium-sized enterprises affected by COVID-19.

Liquidity supply to financial institutions through unlimited repurchase agreement (RP) purchases and foreign currency loans using currency swap funds with the U.S. Federal Reserve (Fed) significantly improved liquidity conditions in both Korean won and foreign currencies. In the market, the Bank of Korea stabilized the government bond market by purchasing treasury bonds, and to ease corporate financing difficulties, it cooperated with the government and the Korea Development Bank to establish a corporate bond and commercial paper (CP) purchase facility and provided purchase funds.

Thanks to these efforts, the financial and foreign exchange markets have remained stable. The KOSPI index, which hit a low of 1458 on March 19, the lowest since July 2009, rose to 2348 on the 18th, surpassing pre-COVID-19 levels. The selling pressure from foreign investors has eased since June, and bond funds have maintained an increasing trend. The won-dollar exchange rate, which surged to 1285.7 won on March 19, declined to the 1180 won range in August due to the Korea-U.S. currency swap agreement and the global dollar weakness.

However, there are criticisms that the increased liquidity, fueled by accommodative monetary policy and low interest rates, only raises asset prices such as stocks and real estate, and does not flow into productive sectors that could boost the real economy.

According to the Bank of Korea, corporate loans increased by 86.1 trillion won and household loans by 48.2 trillion won from January to July this year. Corporate loans increased for both large corporations (26.1 trillion won) and small and medium-sized enterprises (60 trillion won), supported by accommodative monetary policy and government and bank funding support. Household loans also rose sharply, mainly driven by housing-related funding demand.

Liquidity is also expanding rapidly. The Bank of Korea explained that the increase rate of M1 (narrow money) has risen sharply compared to M2 (broad money) due to a relatively large increase in demand deposits. As of June, the year-on-year growth rate of M1 was 9.9%, and M2 was 21.3%.

Governor Lee emphasized, "We will carefully monitor changes in financial stability, such as the increase in household debt due to rising housing prices and the concentration of funds in the real estate market," and added, "Given the high domestic and external uncertainties, we will make special efforts to maintain stability in the financial and foreign exchange markets and ensure the smooth flow of credit."

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