Bank of Korea Cuts Rates to Record Low in Bid for Recovery
Bank of Korea is considering unconventional policy tools to support growth, Governor said after cutting rates to a record low.
(Bloomberg) -- The Bank of Korea cut rates to a record low and forecast the first economic contraction since the Asian financial crisis, but stopped short of offering clarity on what future steps it might take to shore up an economy battered by the coronavirus pandemic.
Following the BOK’s unanimous decision on Thursday to cut the the seven-day repurchase rate to 0.5%, BOK Governor Lee Ju-yeol said the central bank is considering using unconventional policy tools to support growth, but shied away from the specifics sought by investors.
“Should it be deemed necessary to expand the accommodative stance of monetary policy further, we could actively respond with policy tools other than rates,” Lee said at a press briefing, adding that all options are on the table.
While Lee sounded more open than ever to unconventional actions, market participants and economists have been looking for clearer guidance. South Korea’s government bond futures erased earlier gains after the comments, having surged following the BOK’s decision.
“His answers were ambiguous,” said Kim Myoungsil, a fixed-income analyst at Shinhan Investment. “Markets wanted to hear if the bank would go from simple government bond purchases into QE like in other countries.”
Lee acknowledged Thursday’s decision takes the key rate close to the effective lower bound and said the BOK will actively purchase government bonds to stabilize markets if needed. Still, he said those purchases should be seen as different from QE by other central banks that seek to flatten the long-term yield curve.
“It again sounds as if this would be a conditional move in response to market volatility,” Rob Carnell, chief economist for Asia Pacific at ING Groep NV, said in a note. “A more reasonable interpretation is that the BOK is now taking a back seat to the government and anticipating a more forceful fiscal response to provide the bulk of ongoing support for the economy.”
Grim Outlook
The central bank said the economy will contract 0.2% this year, a dramatic downgrade from the 2.1% growth it had forecast at the onset of the coronavirus outbreak in February. Inflation will slow to 0.3%, the BOK said.
The forecasts are based on assumption that the global pandemic peaks this quarter, but do not account for a potential rekindling of the U.S.-China trade war, Lee said.
Despite South Korea’s overall progress in containing the outbreak, sporadic cases are continuing to emerge. Exports are slumping as key overseas markets struggle to reopen from lockdowns, while job losses are surging and inflation is slowing.
Escalating tensions between the U.S. and China also pose a risk to South Korea’s economy, Lee said.
The negative growth forecast of 0.2% is also still wishful thinking, given the economy is likely to contract further, said Park Hee-chan, an economist at Mirae Asset Daewoo. “A further rate cut isn’t going to be too effective because the rate is already very low. The BOK will probably turn more to unconventional tools.”
Lee probably wants to see the scale of the third extra budget before he can provide a clear estimate on bond purchases, and that caution drove the bond market down toward the end of his briefing, said Theo Huh, an analyst at Samsung Futures Inc.
“It came short of expectation,” Huh said. “Maybe there was no talk within the BOK yet, or he exercised restraint so he could draw maximum effect later.”
Thursday’s decision was the first under the BOK’s new board since three members joined late last month. One of the new members, Cho Yoon-je, didn’t take part in the vote Thursday as his stock holdings were still under review, the BOK said.
What Bloomberg’s Economist Says
“With the government expected to land another sizable fiscal stimulus package in the coming weeks, Governor Lee Ju-yeol signaled that the central bank may step in with ad hoc government bond purchases to stabilize markets -- though we expect it will stop short of introducing a full-fledged quantitative easing program, for now.”
-- Justin Jimenez, economist
Click here to read more.
©2020 Bloomberg L.P.