(3rd LD) BOK trims rate to record low of 0.75 pct to support economy amid virus outbreak

(ATTN: UPDATES with remarks from BOK Gov. Lee Ju-yeol, additional information, minor edits in paras 8-9, 13-26)
By Byun Duk-kun

SEOUL, March 16 (Yonhap) -- The Bank of Korea (BOK) delivered an unexpected rate cut to send its key rate to an all-time low on Monday, joining other global peers to help minimize the fallout from the spread of the new coronavirus and financial turmoil.

In a hastily organized rate-setting meeting, the BOK slashed the key rate by half a percentage point to 0.75 percent.

The BOK's emergency rate cut marked the first of its kind in over 10 years. South Korea's key rate had been kept at 1.25 percent since October.

The bank also cut borrowing costs for its loan facility scheme aimed at helping smaller companies and made more bonds sold by banks eligible for its open market operations to help raise liquidity in the financial system.

The BOK had been reluctant to cut the rate at its latest rate-setting meeting held Feb. 27, more than a month after Seoul reported its confirmed case of COVID-19.

The bank insisted the fallout from the virus, despite being very serious and damaging, required industry or business-specific support measures, instead of a monetary policy shift.

BOK Gov. Lee Ju-yeol said it was the faster and wider spread of the virus that had forced the central bank to make the emergency rate cut.

"COVID-19 spread much faster and to more regions than anticipated, and thus the board decided its impact on economic activities will be much greater than earlier expected and that its effect will also be prolonged as the virus spreads throughout the globe," Lee said of the reasons for the cut in a press briefing.

"Since the last Monetary Policy Board meeting, concerns about a global economic slowdown have deepened with COVID-19 spreading globally," the BOK said earlier in a statement.

"The board, therefore, judged that further monetary policy accommodation is called for in order to ease volatility in the financial markets and reduce the effects on future economic growth and inflation," it added.

The BOK earlier slashed its growth estimate for the South Korean economy to 2.1 percent from 2.3 percent forecast late last year.

Lee said an additional downward revision for the South Korean economy would be inevitable.

"We did not expect the virus to spread so rapidly and so widely throughout the globe. Considering such a wide spread of the virus, the country's economic growth may be expected to fall short of the earlier estimate," the top central banker told the press briefing.

Many already expect South Korea's growth to dip to its lowest level in over 10 years.

Global ratings agency S&P has slashed its growth projection for South Korea to 1.1 percent in two downward revisions in less than a month, with another global credit appraiser, Moody's, also slashing its growth estimate to 1.4 percent from the previous 2.1 percent.

The South Korean economy grew 2 percent last year, marking the slowest growth since 2009, when it expanded 0.7 percent from a year earlier.

Monday's rate cut followed the second emergency rate cut by the U.S. Fed in less than two weeks.

The Fed slashed its own rate by 100 basis points on Sunday (U.S. time) to a target range of 0 percent to 0.25 percent.

The BOK governor noted the U.S. rate reductions may have lowered what he called the "effective lower boundary" for South Korea's own key rate.

"Because the U.S. Fed slashed its rates by such a large margin, we believe the possibility of capital outflow due to our rate reduction will remain relatively limited," said Lee.

He refused to offer a direct answer when asked about the possibility of an additional rate cut down the road.

"I can only say the BOK is prepared to take adequate measures, depending on changes in economic conditions, while considering all available measures," the BOK chief said.

Lee noted such measures could include a currency swap arrangement with the United States, but refused to confirm whether such a deal was being pursued.

"When the local foreign exchange market became unstable in the midst of the 2008 financial crisis, the Korea-U.S. currency swap deal contributed to market stabilization. It is true that a currency swap arrangement with the United States can be an excellent safety net against risks in the foreign exchange market," he said.

The BOK's rate cut follows a series of steps aimed at minimizing the economic fallout from COVID-19.

The BOK earlier raised its ceiling on low-interest loans extended by banks to small and medium-sized businesses to 30 trillion won from the previous 25 trillion won.

The central bank slashed its lending rates on such special loans by up to 50 basis points to 0.25 percent.

"To manage liquidity in the financial market at a sufficient level, the board will also broaden the eligible collateral for open market operations to include debentures issued by banking institutions," it said.

The government has announced two support packages, worth 20 trillion won (US$16.3 billion), to help stem the virus and keep the local economy from shrinking.

It is also seeking an extra budget of 11.7 trillion won, which, if approved by parliament, would be the largest of its kind to be formed against an outbreak and also the first to be formed in the first quarter since 2009.

bdk@yna.co.kr
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