The Bank of Korea Lowers South Korea's Growth Forecast from -0.2% to -1.3%... Base Interest Rate Holds Steady (Comprehensive)

Domestic COVID-19 Cases Surge Leads to 1.1% Point Downgrade in Growth Rate
Base Interest Rate May Remain Unchanged This Year

[Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] The Bank of Korea has sharply revised its economic growth forecast for this year down to -1.3%. This is a 1.1 percentage point downward adjustment from the -0.2% growth forecast issued in May, just three months ago. The downward revision appears inevitable as the novel coronavirus infection (COVID-19) shows signs of re-spreading domestically. As a result, the earlier hopes for "positive growth this year" and a "V-shaped rebound," which were still alive earlier this month, 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: during the second oil shock in 1980 (-1.6%) and the Asian Financial Crisis in 1998 (-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 0.1% next year.

Meanwhile, the Bank of Korea's Monetary Policy Committee decided at today's plenary session to keep the base 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 appears that further cuts are not possible. Currently, the U.S. Federal Reserve's base interest rate is near zero, and Korea's effective lower bound for the base rate is estimated at around 0.25%. However, due to uncertainties such as a potential second COVID-19 pandemic, any additional rate cuts are being reserved as a last resort.

In March, as financial markets fluctuated during the early spread of COVID-19, the Bank of Korea held an emergency monetary policy meeting and sharply cut the base rate from 1.25% to 0.75%. It then lowered the base rate once more in May.

Experts analyze that the Bank of Korea's significant downward revision of the growth forecast is due to the variable of "domestic COVID-19 resurgence." They also agree that maintaining the base interest rate at its current level within this year is inevitable as the global COVID-19 pandemic continues.

Professor Inho Lee of Seoul National University's Department of Economics said, "It seems the growth rate was revised downward immediately as the domestic spread of COVID-19 worsened," emphasizing, "The spread of COVID-19 domestically must be controlled before October, the start of the fourth quarter." He advised, "If the COVID-19 spread continues until the end of this year, a drop below -2% cannot be ruled out."

Imseon Lee of Hana Bank's Financial Investment Research Institute analyzed, "The increase in domestic COVID-19 confirmed cases seems to be the biggest factor lowering the growth rate." He added, "Even if there is a strong growth rebound in the fourth quarter, recording a growth rate in the 1% range seems difficult." Regarding the base rate freeze, he said, "Since COVID-19 has significantly impacted the real economy, it seems there was a judgment that government fiscal measures would have a more direct effect than monetary policy."

Meanwhile, the Monetary Policy Committee has two remaining meetings this year to decide on the base interest rate, scheduled for October 14 and November 26.

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