Bank of Korea, Monetary Policy Committee Meeting Today... Likely to Keep Base Rate Unchanged Again

Maintaining Monetary Easing Policy in Response to COVID-19 Shock
Difficult to Further Lower Interest Rates Due to Concentration in Real Estate and Stocks

Lee Ju-yeol, Governor of the Bank of Korea [Photo by Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] The Monetary Policy Committee (MPC) of the Bank of Korea (BOK) will hold a plenary session on the 14th to decide whether to cut the base interest rate. Due to the impact of liquidity unleashed by the ultra-low interest rate stance, the real estate and stock markets are showing signs of overheating, leading to expectations that the interest rate will be unanimously kept unchanged.

Financial market experts expect the BOK MPC to maintain the base interest rate at 0.50% per annum during the meeting. According to the 'October 2020 Bond Market Survey Index (BMSI)' released by the Korea Financial Investment Association, all 100 bond experts responded that the MPC would keep the base interest rate unchanged.

As major central banks maintain a stance of interest rate stability to respond to the economic shock caused by the novel coronavirus disease (COVID-19), experts anticipate that the BOK is also likely to maintain an accommodative monetary policy. However, since the current base interest rate is at a record low and close to the effective lower bound, further cuts are considered difficult.

The BOK held an emergency MPC meeting for the first time on March 16, when the economic shock from the spread of COVID-19 became serious, and sharply lowered the base interest rate by 0.5 percentage points from 1.25% to 0.75% per annum. Subsequently, at the MPC meeting on May 28, the base interest rate was further lowered by 0.25 percentage points to a record low of 0.5%. In July and August, the base interest rate was kept unchanged in two consecutive meetings.

By lowering the base interest rate, the BOK is evaluated to have enabled companies and households affected by COVID-19 to raise funds at low interest rates.

However, there have also been side effects. Companies that borrowed money at low interest rates are holding onto cash without spending on productive investments due to COVID-19 uncertainties, and households are showing a concentration in risky assets by investing in real estate or stocks.

According to the 'September 2020 Household Loan Trends (Preliminary)' announced yesterday by the Financial Services Commission, the Financial Supervisory Service, and the BOK, the total household loan balance across all financial sectors increased by 10.9 trillion KRW compared to the end of August. Although this increase was smaller than the previous month’s 14.3 trillion KRW, which was the largest since November 2016 (15.2 trillion KRW), it remains at a high level. The total household loan increase across all financial sectors was 3.2 trillion KRW in September last year and 4.4 trillion KRW in 2018.

The increase in other loans, including unsecured loans, was 3.8 trillion KRW, down 4.2 trillion KRW from the previous month’s 8 trillion KRW but still at a high level. Among these, the increase in unsecured loans accounted for 3.5 trillion KRW, making up most of the other loans. In September last year, the increase in other loans was 0.5 trillion KRW, and in September 2018, it was only 1.2 trillion KRW. The continued low interest rate environment has led to an increase in unsecured loans taken out mainly by bank customers for the purpose of investing in initial public offerings (IPOs) such as Kakao Games and Big Hit Entertainment.

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