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BOK freezes rates at record low, projects bleak economic outlook

South Korea has more room for monetary policy, says central bank chief

BOK Gov. Lee Ju-yeol speaks in an online press briefing (Yonhap)
BOK Gov. Lee Ju-yeol speaks in an online press briefing (Yonhap)

South Korea’s central bank on Thursday decided to freeze its policy interest rate at 0.75 percent, hinting its willingness to review the effects of last month’s big rate cut coupled with quantitative easing efforts.

Following a monetary policy board meeting earlier in the day, the Bank of Korea decided to keep its base rate steady after it slashed it by half a percentage point to a record low on March 16. It was the first emergency rate cut in more than a decade to combat the risks stemming from the novel coronavirus.

Despite a series of policy packages, including the big rate cut last month, Asia’s fourth-largest economy faces a grimmer outlook, the central bank chief said, overturning the previous growth outlook of 2.1 percent in February.

“Though Korea’s economy is projected to see positive growth, it will not be easy for it to rise above 1 percent,” BOK Gov. Lee Ju-yeol said in an online press briefing. And positive growth can only occur if the COVID-19 global crisis starts to subside by the second quarter and economic activities get back on track in the second half of the year, he added.

Lee said there is a good chance that the global economy is heading into a recession and its fate rests on how the pandemic unfolds.

While avoiding direct comment on the possibility of a further rate cut in May, Lee instead expressed confidence that the nation still has more flexibility in its monetary policy.

“I will not comment on the possibility of a rate cut in May but instead say we have more room for monetary policy decisions,” he said.

“The BOK is actively utilizing other policy measures, along with monetary policy steps, to deal with the current situation,” he added.

The central bank has also decided to temporarily broaden the range of collateral to include debentures and special bonds issued by banks and state-run institutions to boost market liquidity.

The rare move -- which will be effective from April 14 to March 31, 2021 -- comes as part of the BOK’s open market operations, apparently aimed to cope with a credit crunch triggered by the novel coronavirus. The BOK usually limits the scope of its purchases to government or government-guaranteed bonds.

It will deal with mortgage-backed securities and debentures or bonds issued by state-run institutions including the Korea Development Bank, Export-Import Bank of Korea, Korea National Housing Corp. and Small & Medium Business Corp. The temporary action is the first of its kind since the 2008 global financial crisis.

“The latest measure is expected to help financial institutions to secure funds and lower financing costs,” the BOK said in a statement.

“Once the BOK starts supplying funds to financial institutions via purchase of special bank bonds or debentures, such banks will be able to issue bonds at a low interest rate. It will also contribute in bringing about security to the market if the funds are also used to purchase corporate bonds,” it added.

Thursday’s announcement deals with outright transactions, in which the central bank purchases or sells eligible securities “outright on the market.” These differ from repurchase operations, which involve securities being sold and then repurchased at a later date.

On April 2, the BOK funneled 5.2 trillion won ($4.2 billion) to the capital market in the first of several repo operations set to take place once every week until end-June. That was part of its earlier pledge to funnel unlimited liquidity into the market.

The central bank will also expand the scope of its repurchase program to bonds issued by the Korea Deposit Insurance Corp.

By Jung Min-kyung (mkjung@heraldcorp.com)
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