South Korea CB holds interest rates, slashes growth outlook
- 27 Feb 2020
South Korea’s central bank (CB) has kept interest rates unchanged on Thursday, dashing expectations for a cut even as it downgraded the growth outlook. The outlook cut amid mounting fears the coronavirus outbreak could derail Asia’s fourth-largest economy. Bank of Korea (BOK) has trimmed 2020 growth outlook to 2.1% against 2.3% previously.
While Bank of Korea Governor Lee Ju-yeol acknowledged the threats from a prolonged outbreak, he also stressed the limits of monetary policy and called for government spending and more targeted measures to deal with the slowdown.
The surprise decision not to ease shows policymakers are taking a conservative approach to dealing with the crisis due to limited stimulus options and concerns about financial stability and a property bubble.
“For now, selectively deploying micro-policies to service sectors and other vulnerable industries would be a more effective set of responses than adjusting the (policy) rate,” Lee said after the bank’s board voted to keep the base rate steady at 1.25%.
Only 10 of 26 economists surveyed by Reuters expected the BOK to keep the key rate unchanged, while the majority expected a cut to 1.00%, which would be the lowest since the bank adopted the current policy system in 1999. The central bank cut rates in July and October last year.
Analysts said Lee’s commentary highlighted a surprising reluctance to loosen monetary settings in the face of the crisis, suggesting the bar may be high for any cuts this year.
The Korean won rose sharply on the surprise hold but later trimmed its gains after the government reported the largest daily increase in virus cases yet.
The yield on 3-year treasury bonds rose as traders pared bets for further easing.
Park Jong-youn, a Seoul-based fund manager at IBK Insurance, said the coronavirus may eventually force Lee to tilt from a stubborn focus on financial stability to economic growth.
“Simply put, Lee is open to a cut but only if the coronavirus situation prolongs. It’s not like people will start spending money just because BOK cuts rates,” Park said.
Ma Tieying, a DBS economist who correctly expected rates to stay unchanged, said the BOK’s policy ammunition was more limited than it was during the SARS and MERS outbreaks, which also hit growth.
At Thursday’s meeting, the central bank downgraded this year’s economic growth forecast to 2.1% from 2.3% previously.
It also raised the ceiling for its special loans programme by 5 trillion won ($4.1 billion) to 30 trillion won, to extend support to retailers and tourism sectors hit by the virus.
One prevailing concern is the risk stimulus worsens a property bubble - Seoul’s median apartment price has shot up almost 50% since President Moon Jae-in took office in May 2017, raising worries about the effects of easier credit.
A weakening won and capital outflow risks may also deter the BOK from cutting rates.
Those risks combined with South Korea’s reliance on global trade leave policymakers in a bind.
South Korea has seen a massive spike in new coronavirus cases and now has more infections than any country outside China. The outbreak has kept consumers at home, weakened trade and fanned investor uncertainties.
President Moon on Monday said a supplementary budget should be drawn up to cushion the virus’s impact on the economy.
About a dozen brokerages from BofA Securities, Capital Economics to Goldman Sachs now see Asia’s fourth-largest economy growing at a slower pace than last year’s paltry 2.0%, which was the worst growth since the global financial crisis.
In a break from decades-old practice, Thursday’s rate decision was announced via emails and text messages, not in the bank’s press room, as authorities seek to contain the spread of coronavirus by limiting crowds.
Meanwhile, Hyundai Motor and its affiliates are ready to decide the location of a new hydrogen fuel-cell system factory this year, which could be in South Korea or overseas, an executive said on Wednesday.
The factory will be capable of producing more than 100,000 fuel cell systems, which include the fuel-cell stack and power control unit, annually from around 2024, Jeon Soon-il, a Hyundai Motor Group executive in its fuel cell division, said at a conference in Tokyo on Wednesday. He declined to name which countries had been shortlisted.
A new factory in Chungju, South Korea, capable of making 40,000 systems a year, will be ready by the end of June, some two and a half years ahead of schedule, Jeon said.
Reuters
