Bank of Korea Shows World Alternative Response to Virus Hit

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South Korea offered global policy makers an alternative approach for dealing with the impact of the coronavirus outbreak by refraining from a knee-jerk interest rate cut to help a struggling economy at the heart of the global tech supply chain.

Bank of Korea Governor Lee Ju-yeol said the appropriate response at this stage was targeted support for the companies most affected by the biggest virus outbreak outside China, not a wider-reaching rate reduction. That’s even after downgrading growth forecasts for the year and acknowledging that the epidemic could push the economy into reverse this quarter.

Bank of Korea Shows World Alternative Response to Virus Hit

A majority of economists polled by Bloomberg had expected the bank to respond by lowering the rate to a fresh record low, repeating a similar move taken by the bank following a virus outbreak in 2015.

The BOK’s measured response comes after the Federal Reserve, the European Central Bank and other major central banks have flagged the risks to global growth if the virus epidemic continues to escalate. While some Asian banks have already opted to cut rates, there’s still little consensus on the best way to respond even after a meeting of G-20 finance and monetary chiefs at the weekend.

“A health security crisis is the cause of the current economic difficulties,” Lee said. “In a situation like that, micro support for self-employed businesses and companies in trouble is more effective than an interest-rate cut.”

Specifically, the BOK announced an increase in the cap for cheap loans available to companies affected by an accelerating virus outbreak in Korea that has now topped 1,500 cases and left pockets of the country locked down. The BOK’s lending facility is one of the policy tools it uses to manage funding conditions, and it has raised the ceiling during previous economic downturns.

A somewhat similar response was taken by the People’s Bank of China earlier this month when it provided medium-term funding to commercial lenders and cut the interest rate it charges for the money.

The bank now sees the economy growing 2.1% this year, down from a 2.3% projection in November, reflecting uncertainty over the impact of the virus.

Both exports and imports to China fell in the first 20 days of February despite the benefit of more work days, signaling that the virus is disrupting supply chains between South Korea and its biggest trading partner.

Little Room

While Lee still kept the door open to a possible rate cut in response to the virus, his decision illustrates the BOK’s reluctance of use remaining policy space in a blanket response when the costs of record low interest rates are stacking up.

“Cutting rates to zero and printing electronic money in a classic monetary response to a global slowdown will be ineffective this time around, as coronavirus infects the cogs that make up supply chains and consumer consumption,” Jeffrey Halley, senior market analyst for Oanda Asia Pacific Pte., wrote after the decision. “If you can’t pay your bills at the end of the month, you are done.”

Governor Lee said high household debt, and the difficulty to stabilize housing prices were among the factors behind the stand pat decision, and said the board assumed the coronavirus spread would peak in March. Economists who projected a rate hold pointed to concerns about an overheated property market and high household debt, alongside a weakening currency.

“The BOK may cut rates after the government rolls out an extra budget in March, creating the impression that the two are working closely,” Meritz Securities Co. economist Stephen Lee said. “For now, providing support for small businesses while keeping the rate on hold is the optimal choice for the BOK.”

What Bloomberg’s Economist Says

“With consumers staying home and shops closed due to virus outbreak, broad-based monetary easing may have diminished effectiveness. That means the impending fiscal stimulus will need to take the lead to support growth.”

--Justin Jimenez, economist

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©2020 Bloomberg L.P.

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