Bank of Korea seen cutting rates to new lows

SEOUL: The Bank of Korea (BOK) is expected to cut its key interest rate to a fresh record low and announce more bond purchases this week as the pandemic takes a toll on exports essential to the country’s economy.

Eighteen of 23 analysts surveyed by Bloomberg expect the BOK to cut rates by 25 basis points (bps) today, while one said it could be reduced by twice as much. The rest forecast no change at 0.75% after an emergency cut in March and unprecedented steps to extend liquidity to firms and financial markets.

Even though South Korea has made progress in controlling the domestic outbreak, the economic pullback is far from over. Exports are plunging as many trade partners struggle to end lockdowns, while consumers remain wary of traveling or shopping. Inflation has slowed sharply to near zero.

“The risk of second-wave infection remains in place and domestic economic activities are still below normal,” said DBS Bank economist Tieying Ma. “The deeply negative output gap and the rise in deflation risks should continue to put pressure on the BOK to cut rates.”

The BOK is also set to update growth and inflation forecasts. Analysts will be watching to see whether the board maintains its relative optimism after Governor Lee Ju-yeol last month said he still sees the economy eking out growth this year. Private sector economists surveyed by Bloomberg project a 0.5% contraction in 2020.

Many analysts expect the central bank to beef up bond purchases as the government’s third extra budget is underway. President Moon Jae-in said Monday the proposal would be bigger than the previous two, which were around Us$10bil each. He has pledged to use the budget to fund what he’s called a “New Deal” project to boost growth and jobs once the outbreak subsides.

The BOK will cut once more this year, but more likely in July than this month, according to Angela Hsieh, an economist for Barclays Bank PLC. “The BOK may prefer to time the rate cut with the third fiscal policy package to maximise the impact, considering its limited policy ammunition.”

Unlike some of its counterparts, the BOK has never publicly mentioned what it sees as the lower bound of its key interest rate. At 0.75% though, it doesn’t have much room as South Korean policy makers are wary of taking rates too low and risking capital outflows.

The BOK has taken a series of unprecedented actions to re-energise the economy since cutting its interest rate by 50bps in March. It has pledged unlimited liquidity through June via repurchase agreements and started lending to brokerages.

Last week, it said it would buy corporate debt including lower-rated bonds and commercial paper via a special purpose vehicle.

Thursday’s decision will be the first attended by three new board members that include Cho Yoon-je, seen as an architect of Moon’s economic agenda.

The other two newcomers are viewed as supportive of the current government stimulus, based on their comments upon joining the board. — Bloomberg