Bank of Korea sharply lowers this year's growth rate forecast from -0.2% to -1.3% (Update)

[Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] The Bank of Korea has significantly revised its economic growth forecast for this year down to -1.3%. This marks a downward adjustment of more than 1 percentage point from the -0.2% growth forecast issued in May, just three months ago. The revision appears inevitable as the novel coronavirus infection (COVID-19) shows signs of re-spreading domestically, forcing a downward revision of the growth rate. As a result, the previously hopeful expectations earlier this month for "positive growth this year" and a "V-shaped rebound" have become impossible. This marks the first time in 22 years since the Asian Financial Crisis that the Korean economy has experienced negative growth.

Since the Bank of Korea began compiling Gross Domestic Product (GDP) statistics in 1953, the Korean economy has only contracted twice: in 1980 during the second oil shock (-1.6%) and in 1998 during the Asian Financial Crisis (-5.1%). The Bank of Korea's forecast of negative growth is the first in 11 years since July 2009 (-1.6%). However, the actual growth rate in 2009 was 0.8%, so negative growth was not recorded.

The Bank of Korea projects next year's growth rate at 2.8%, and expects consumer price inflation rates of 0.4% this year and 1.0% next year.

Meanwhile, at today's main meeting, the Bank of Korea's Monetary Policy Committee decided to keep the benchmark interest rate at a record low of 0.50% per annum. This decision reflects the judgment that an accommodative monetary policy must be maintained amid the ongoing spread of COVID-19. Since the interest rate is already at its lowest level, it is understood that further rate cuts are not possible. Currently, the U.S. Federal Reserve's (Fed) benchmark interest rate is near zero (0), and Korea's effective lower bound for the benchmark interest rate (the minimum rate to which it can be lowered) is estimated to be around 0.25%. However, due to uncertainties such as the second COVID-19 pandemic wave, additional rate cuts appear to be reserved as a last resort.

In March, when the COVID-19 outbreak initially unsettled financial markets, the Bank of Korea held an emergency monetary policy meeting and sharply cut the benchmark interest rate from 1.25% to 0.75%. It then lowered the rate once more in May.

Today's decision to hold the benchmark interest rate steady was already anticipated by the market. According to a survey conducted by the Korea Financial Investment Association from the 11th to the 18th among 100 bond market participants, 99 respondents expected the benchmark interest rate to remain unchanged, with only one expecting otherwise.

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