[Q&A] Ijuyeol: "There is room for interest rate cuts if COVID-19 resurges, but caution is needed"

Meeting of the Monetary Policy Committee on the 27th
Annual Growth Rate Sharply Revised Down to -1.3%

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] On the 27th, Lee Ju-yeol, Governor of the Bank of Korea, said, "There is still room for a rate cut at present in case the economic shock worsens."

Governor Lee held an online live press conference immediately after the Monetary Policy Committee meeting and stated, "The base interest rate is currently at a considerably low level, so whether to lower it further requires careful consideration of the expected benefits and side effects."

Earlier, the Bank of Korea's Monetary Policy Committee held a meeting to decide the monetary policy direction and decided to keep the base interest rate at a record low of 0.50%. Additionally, due to the domestic resurgence of COVID-19, the growth forecast for this year was lowered by 1.1 percentage points from the previous -0.2% to -1.3%.

Below is a Q&A with Governor Lee.

▲ What are the main reasons for the downward revision of the growth rate? Is there a possibility of growth in the -2% range?

= When forecasting the growth rate in May, it was expected that the global spread of COVID-19 would ease in the second half of the year. However, the global spread has not subsided, and recently there has been a resurgence domestically. As a result, the improvement in our exports and domestic consumption is expected to be slower than initially anticipated, which is the main reason for the revision. Other factors include export performance in the second quarter falling short of expectations and the longer-than-usual rainy season and heavy rains. Regarding the -2% growth possibility, it will depend on the development of COVID-19 and the government's response. If the situation improves, the forecast could be better, but if it worsens, the figure could fall below that.

▲ Why is this growth forecast lower than the pessimistic scenario forecast (-1.8%) from May?

= The pessimistic scenario in May was based on the assumption of strengthened international travel restrictions. However, despite the increase in global confirmed cases in June, countries eased travel restrictions and resumed economic activities. It was expected that if cases increased, travel restrictions and other quarantine measures would be strengthened, but in reality, that did not happen.

▲ How significant do you expect the impact on our economy to be if social distancing is raised to level 3?

= If social distancing is strengthened beyond the current level, the recovery of the real economy will be constrained. Consequently, stock prices and exchange rates will also be affected. The Bank of Korea is monitoring the possibility of increased volatility in financial markets and will continue efforts to stabilize the market.

▲ There is an opinion that monetary policy is limited in addressing shocks to the real economy.

= The Bank of Korea cut interest rates sharply in March and implemented active monetary policies such as expanding liquidity supply. The effects of the accommodative monetary policy have clearly appeared. The active monetary easing policy has significantly eased financial markets and restored stability in the foreign exchange market. As a result, it has been quite effective in preventing excessive contraction of the real economy. Monetary policy and fiscal policy differ in their effects. Monetary policy decisions are quick, but effects appear over time. Fiscal policy effects appear immediately upon execution and can target specific areas. Since they have different characteristics, it is not appropriate to definitively say which is more effective. In a health crisis, monetary and fiscal policies should be implemented complementarily.

▲ With the 4th supplementary budget and the 2nd disaster relief fund, deficit bond issuance is expected to increase. Is there any change in the stance on actively purchasing government bonds?

= It is true that government bond issuance is expected to expand due to active fiscal policy, raising concerns about supply-demand imbalance. However, demand for government bonds from domestic financial institutions and foreign investors remains quite firm. If a supply-demand imbalance causes increased volatility in long-term interest rates, the Bank of Korea plans to actively purchase government bonds, and this stance remains unchanged. Yield Curve Control (YCC) is not considered a policy to be implemented in the near future.

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