Article:
South Korea cuts rates, flags worst year for
economy since 1998
By Cynthia Kim, Joori Roh
SEOUL (Reuters) - South Korea’s central bank cut interest rates to a record low on
Thursday as it warned the coronavirus pandemic would be worse for Asia’s fourth-largest
economy than the 2008 global financial crisis.
The Bank of Korea's board voted unanimously to cut its policy rate KROCRT=ECI by a
quarter of a percentage point to 0.5%, the lowest since the bank adopted the current system
in 1999. The move was expected by 12 of 19 economists polled by Reuters.
The bank also downgraded its 2020 economic projection to a 0.2% decline from 2.1%
growth forecast in February. That would be the biggest contraction since 1998, during the
Asian financial crisis.
The BOK also sees inflation at 0.3% this year, down from its February forecast of 1.0%.
Governor Lee Ju-yeol said the bank is ready to ramp up government bond buying to soak up
the massive public debt needed to cover the cost of new stimulus.
“We plan to actively purchase treasury bonds to stabilise markets should long-term yield
volatility increase,” Lee said in a press conference.
“With the rate cut, the policy interest rate is now very close to the effective lower bound,” Lee
added.
That prompted some analyst to expect the easing cycle may have reached its end although
Lee declined to comment on whether or not additional easing was needed.
The BOK is working in tandem with the government to extend liquidity to businesses hit by
the coronavirus pandemic.
South Korea has rolled out a 245 trillion won ($197.9 billion) package -- 12.8% of gross
domestic product -- to combat the virus fallout. It is also preparing a third supplementary
budget after April exports suffered the worst slump in 11 years and jobs vanished at the
fastest pace since 1999.
The BOK had previously pledged unlimited liquidity through to June via repurchase
agreements and began lending to securities firms for the first time in the its 70-year history.
, South Korea’s central bank joins counterparts in the United States, Australia, UK and New
Zealand in bond-buying operations to nurse the economy through the pandemic.
As the bank ramped up stimulus on Thursday, South Korea reported 79 new coronavirus
cases, the largest one-day increase since April 5, raising fears of a second wave of
infections after the country managed to bring down that number to around 10 in early May.
The country has reported 11,344 infections and 269 deaths.
Bond futures rallied after the economic outlook was downgraded and Lee's hints of treasury
bond buying, with June futures on three-year treasury bonds KTBc1 up 0.13 points at
112.25.
“The BOK did all it can, giving even a negative growth outlook,” said Yoon Yeo-sam, a
fixed-income strategist at Meritz Securities. “With the cut today, there is now market
expectations for another cut to 0.25%.”
