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Bank of Korea Faces Tough Call Amid Virus Hit: Decision Guide

Bank of Korea Faces Tough Call Amid Virus Hit: Decision Guide

(Bloomberg) -- The Bank of Korea faces a difficult decision Thursday over whether to take further action now or hold back some of its ammunition for a long-haul fight against the coronavirus pandemic and a looming global recession.

Analysts are split, with some expecting the central bank to follow up on its emergency interest rate cut last month with a further reduction while others see it opting to monitor the impact of its current measures ahead of a policy board shakeup later in April.

Nine of 17 economists surveyed by Bloomberg expect the South Korean central bank to hold its rate at 0.75%. The rest see a 25 basis point cut to a fresh record low.

Bank of Korea Faces Tough Call Amid Virus Hit: Decision Guide

South Korea is seeing a rising economic toll from the outbreak. Many of its trade partners are in lockdown while consumers at home remain wary of going out to spend. An increasing number of analysts expect South Korea to post the weakest growth since the Asian financial crisis this year, or even contract.

Economists calling for a hold this week point to the BOK’s limited conventional policy options and the need to watch how stimulus feeds through the economy. The government is planning a second extra budget, which could partially offset negative fallout from the epidemic.

“With rates so low, it makes sense to wait and see before using their remaining ammo,” said Eddie Cheung, a strategist at Credit Agricole CIB. There is another meeting in May so the BOK has time to judge the impact of the emergency rate cut last month, he said.

The BOK last month pledged unlimited liquidity through June via repurchase agreements. The bank may also announce new liquidity measures on Thursday, regardless of whether it adjusts the policy rate. Governor Lee Ju-yeol last week said the central bank could mull extending loans directly to troubled financial companies if the situation worsens.

The central bank is expected to release its decision around 10 a.m. and then its policy statement about half an hour later. Governor Lee usually holds a press conference after 11 a.m.

Lee’s Take

How Lee assesses the state of the economy and the effectiveness of stimulus measures by the government and the central bank so far will be closely watched for cues on policy. The BOK will probably have to slash its projections for growth and inflation in May, when it is due to update forecasts.

South Korean companies still face funding strains despite the government’s massive fiscal package to ease such problems. Actions so far by the BOK look relatively modest when compared with other central banks cutting rates close to zero and purchasing bonds under quantitative easing programs.

“It will be difficult for the BOK to do nothing at the April meeting,” Oh Suktae, an economist for SG Securities, wrote in a note last week, expecting a 25 basis point cut. “It is obvious that the ongoing disruption in global demand due to the lockdown everywhere will soon lead to a significant decline in Korea’s exports.”

Barring any more emergency meetings, Thursday’s will be the last rate decision for four of its seven board members whose terms end on April 20. Another member is slated to leave in August, setting the BOK up for the largest shakeup in decades. The new composition of the board could sway the BOK’s policy amid an acute economic crisis.

Policy Recap

  • A record low interest of 0.75% after the first emergency meeting since the global financial crisis
  • Unlimited liquidity pledged via repurchase agreements between April and June
  • Reactivation of a currency swap deal with the Federal Reserve to ease dollar shortages
  • Government bond purchases worth 1.5 trillion won for the explicit goal of stabilizing markets

©2020 Bloomberg L.P.