Bank of Korea (BOK) Governor Lee Ju-yeol warned that the South Korean economy would take a bigger hit from the COVID-19 pandemic than the global financial crisis, but stopped short of another big ramping up of stimulus for now.
The central bank held its policy interest rate at 0.75 percent in a move forecast by nine of 17 analysts surveyed by Bloomberg.
The BOK announced further measures to channel liquidity to the economy, expanding the range of bonds eligible for its open market operations and flagging outright purchases of government bonds.
Photo: EPA-EFE
The stand-pat decision and Lee’s comments suggested that while the outlook for the economy is bad, the bank would rather bide its time before any further major moves.
Lee said the BOK still has room to take rates below the current record low, and pledged to take active steps within the legal boundaries set out for the bank.
“The chances of a global recession are high, with the shock to economies expected to be larger than that during the global financial crisis,” Lee said in a post-decision briefing.
South Korea’s economic growth would significantly trail the 2.1 percent forecast made in February, but should manage to stay above 0 percent this year, he said.
The central bank is taking stock after a flurry of measures last month, including an emergency rate cut and a pledge to inject unlimited liquidity into the market via repurchase agreements.
The South Korean government is also rolling out stimulus like never before, with a second extra budget lined up.
“Considering the diminishing ammunition after previous cuts, it’s not surprising the BOK is holding,” said Chang Min, a researcher at the Korea Institute of Finance and a former central bank official. “This doesn’t mean that the situation is improving, though. The BOK is likely to keep coming out with non-rate measures to stabilize markets.”
While the BOK has taken unprecedented steps to backstop the economy, they have been relatively modest compared with global peers who cut rates close to zero and stepped into quantitative easing.
While some of the moves Lee has taken to ensure ample liquidity could inch the BOK a little closer toward quantitative easing, there is still no clear sign the bank is ready to take a deep plunge into non-conventional policy.
The South Korean bank appears to prefer more targeted approaches, while preserving bazooka shots of another rate cut and non-traditional measures for when the economy is in emergent need.
Lee said BOK lending to private firms could exceed the typical role of a central bank and would require discussions with the government.
After Lee’s briefing, the BOK said it planned outright purchases of 1.5 trillion won (US$1.23 billion) of government bonds to help financial firms unload some of their holdings to increase their liquidity.
With the pandemic continuing to wreak havoc on South Korean economy, the BOK’s rate pause might indeed be short-lived. About half of the surveyed analysts had expected the BOK to ease yesterday.
Two of the BOK’s board members dissented and called for an immediate 25 basis point cut at the meeting.
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