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[News Analysis] BOK weighed by US rate cut, raising growth pessimism

By Bae Hyunjung
Published : March 5, 2020 - 15:47


Bank of Korea Gov. Lee Ju-yeol chairs the Monetary Policy Board on Feb. 27, when the central bank froze the nation's policy rate at 1.25 percent. (Yonhap)



Following the United States’ abrupt rate cut action and the escalating pessimism of global investors, South Korea finds itself with little choice but to bend prudence and lower its policy rate as soon as possible, according to market observers.

Concerns are mounting, however, that Asia’s fourth-largest economy may already have missed the chance to take relevant monetary moves, considering the prolonged impact of the globally spreading COVID-19.

The key agenda for Korea’s monetary policymakers now is whether to shift ground and hold an earlier-than-expected rate-setting meeting this month.

JP Morgan said Thursday that it has lowered the outlook for Korea’s gross domestic product for this year to 1.9 percent.

The New York-based global investment bank had previously suggested a 2.2 percent estimate a month earlier, when the China-originated new coronavirus had not yet fully impacted Korea.

Taking into account the ongoing spread of the new epidemic and the consequent downside impact on the growth outlook of key economies, Seoul is likely to see a slow recovery pace even after the first quarter, it said.

Global credit ratings agency Moody’s also lowered its outlook on the Korean securities market to “negative” from the conventional “stable,” citing the slower economic growth and prolonged lower interest rates.

The change came after the benchmark Kospi dipped below the psychological barrier of 2,000 points earlier in the week and has lingered in the vicinity, with no clear signs of immediate recovery.

The escalating pessimism detected from global market observers added pressure on the central bank here which, until recently, refrained from prompt monetary policy responses to the COVID-19 fallout.

The Bank of Korea, after an emergency meeting of senior officials on Wednesday, reaffirmed its decision to maintain the base rate at the current 1.25 percent, but leaned further toward the likeliness of an imminent rate cut.

Earlier in the day, the US Fed cut its base rate by an unusual 50 basis points to 1-1.25 percent to reflect the risks caused by the coronavirus spread. The move, which marked the first such abrupt action since the 2008 global financial crisis, brought the US benchmark rate to that of Korea.

“We will take such changes into account when operating monetary policies hereafter,” the BOK said in a statement.

Though no immediate actions have been taken yet, the latest remarks of the central bank are being interpreted as a sign of anxiety from monetary policymakers here.

It also rekindled speculations that the BOK may consider holding an extraordinary session of its rate-setting Monetary Policy Board within this month, prior to its scheduled meeting on April 9.

“The possibility has increased that (the BOK) may carry out a rate cut through an emergency meeting in March,” said Kang Seung-won, analyst at NH Investment and Securities.

While most observers agreed that the rate cut will take place no later than April, some critics noted that the BOK’s rate freeze decision last month was inappropriately complacent, given the development of the epidemic.

“The BOK has gestured to make its future moves after observing the monetary actions of other key countries, instead of taking preemptive actions,” said Meritz Securities analyst Yoon Yeo-sam.

Pointing out the wait-and-watch approach, Yoon claimed that the BOK will likely defer its anticipated rate cut to the regular board meeting in April.

By Bae Hyun-jung (tellme@heraldcorp.com)

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