Bank of Korea Governor Lee Ju-yeol knocks on the door of the Financial Monetary Commission meeting on the morning of 28 August. On this day, the Bank of Korea cut its benchmark interest rate from 0.75% to 0.5% per annum. [사진 한국은행]

The Bank of Korea has cut its benchmark interest rate by 0.25 percentage points. A new type of coronavirus infection (corona19) is a dimension to prepare for the impact and long-term potential for the spread.

significantly lowered from 2.1% of the previous forecast.
Base rate down 0.25%P to 0.5% per annum
“Cut to the lows we can afford”
Further drop-off concerns foreign funds

Han held a plenary session of the Monetary And Monetary Commission on 28 March and cut the base rate from 0.75% per annum to 0.5% per annum. It has been about two months since the interim fed meeting opened in March and lowered the base rate by 0.5 percentage points. The market had a predominance in the prospect of freezing, but Han pulled out the sword first. All six members of the Kumtong Committee chose to cut interest rates, except for Cho Yoon-je, who failed to attend the vote due to the reasons for the withdrawal (overstock holding).

At a press conference held shortly after the Kumtong Committee, Governor Lee Joo-yeol said, “Exports have decreased dramatically amid sluggish consumption, and equipment investment has slowed,” explaining that “the employment situation is not good, such as the decrease in the number of workers mainly in the service industry.” Some have predicted that the next fed will be lowered in July, as market interest rates will rise as the third round of cardinal passes and the issuance of government bonds increases.

Regarding this, Mr. Yi said, “Since economic growth is expected to drop to around 0%, and inflation is likely to be significantly lower, it is desirable to lower interest rates at this time.”

Korea’s reverse growth was only twice in 1980 and 1998

Graphic by Kim Kyung-jin

On this day, Han significantly revised south Korea’s economic growth forecast for this year from 2.1% to -0.2%. Han’s negative growth forecast was in July 2009 (-1.6%) at the time of the financial crisis. It’s been 11 years since. The korean economy’s reverse growth was 80 years (-1.6%) and 98 years (-5.1%) since 1953, when GDP statistics began. There are only two times. In 2009, when negative growth was forecast, the actual growth rate was 0.8%.

Han’s outlook was based on the assumption that the number of new and remaining corona 19 confirmors peaked during the second quarter, and that containment measures would be gradually eased. It was determined that the number of confirmors could fall to -1.8% if the peak was pushed back to the third quarter and the easing of containment measures was delayed.

Above all, exports, consumption, and investment are dying together. Exports, which had been in decline until March, had fallen sharply since April. Compared to the previous year, it decreased by 24.3% in April and 20.3% in May (20). The global outbreak of Corona 19 has frozen international trade. The us-China conflict is also troublesome. If the two countries fight hard, South Korea is hard to gain in any form.

Vice President Lee Hwan-seok said, “The uncertainty of the growth path is greater than ever,” and that “the domestic economy will shrink significantly in the first half of the year and gradually improve in the second half as consumption and export recovery.” Han is the backdrop to this once again as a redemption pitcher.

However, the effect of the rate cut is unlikely to be significant at the moment. During the 2008 financial crisis, the base rate was 5%. Han quickly lowered interest rates to 2%, loosening the money, and it was a big benefit in the short term. Lower the base rate reduces the cost of procurement for households and businesses, thereby stimulating the economy. But for now, interest rates are already too low. It’s not that you can’t invest because of the lack of money, and because of the interest burden.

Korea Growth Forecast for This Year by Institutions

The side effects of the interest rate cut are a concern. Lower interest rates, the higher the exchange rate of the won and the dollar (depreciation of the krw value). It can encourage foreign investors to deviate their funds. Low lending rates may lead to real estate. It is also pointed out that Han should have saved the card in case it got worse. Soyoung Kim, professor of economics at Seoul National University, said, “It is a measure of the sluggish ness of the real economy, and i doubt whether lowering interest rates will increase consumption.”

In any case, the base rate has been down to 0.5% for the first time in history. In fact, there is an analysis that the Rok economy has lowered to the lows it can afford. Mr. Yi said, “The effective fall is variable according to financial and economic conditions at home and abroad, but this rate cut can be seen as a significant step closer to that level.”

In general, if interest rates fall below the effective rate, there are more side effects such as foreign capital departures, rising exchange rates, and increased household debt than positive effects such as stimulus. Park Sung-wook, director of macroeconomic research at the Korea Institute of Finance, said, “Since interest rates have been down considerably, unless developed countries such as the United States choose negative interest rates, the breadth of fortunes can be seen as narrow.”

Lee Ju-yeol : “We will actively seek to purchase treasury bonds when necessary”

If the Corona19 crisis is prolonged and Han needs an additional response, it means that he will have to consider unconventional monetary policy, such as quantitative easing, rather than interest rate cuts. The most common means is to increase the purchase of treasury bonds. The number of issuance of deficit bonds has increased due to the succession of the cardinal. The size of the issuance of bonds, such as the third cardinal and the Period Industrial Stability Fund, is expected to be considerable. Mr. Yi said, “We plan to actively seek to purchase treasury bonds if necessary in order to stabilize the market.”

Even with the prospect of reverse growth, there is currently no reversal card for the corona 19 situation, other than that it is rapidly calming down. Kang Hyun-joo, director of macrofinance at the Capital Markets Research Institute, said, “The market expects a V-shaped rebound, but the worst case scenario of the number of confirmors increasing again should be kept in mind.”

Bond prices rose on the day. The three-year Treasury note, an indicator of market interest rates, fell 0.045 percentage points to an annual rate of 0.818%. Stocks were also weak. The Kospi and Kosdaq fell 0.13% and 2.19%, respectively.

Jang Won-seok and Jung Yong-hwan reporters

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