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BOK tipped to maintain rate at record low, seek unconventional measures

All Headlines 11:00 July 11, 2020

By Byun Duk-kun

SEOUL, July 11 (Yonhap) -- The Bank of Korea (BOK) is widely expected to hold the policy rate frozen for the remainder of this year, and search for other ways to support the pandemic-hit economy, analysts said Saturday, noting the South Korean central bank may already be close to reaching the limits of its conventional measures.

The BOK has slashed the key rate by a whopping 0.75 percentage point in two rounds of rate reductions that included its first emergency rate cut in over a decade, sending the base interest rate to a record low of 0.5 percent in May.

The bold, rarely seen move by the South Korean central bank was apparently prompted by worsening economic conditions at home and abroad amid the COVID-19 pandemic.

The file photo, taken on Dec. 1, 2019, shows stacks of import-export cargo containers at South Korea's largest seaport in Busan, located some 450 kilometers south of Seoul. (Yonhap)

Local analysts agree the central bank will likely stand pat on the policy rate, at least for some time.

In a recent survey by Yonhap Infomax, the financial news arm of Yonhap News Agency, all 17 analysts polled predicted the BOK to keep the policy rate steady at its next rate-setting meeting, slated for Thursday.

All but one also expected the South Korean central bank to keep the key rate frozen until March 2021.

"The BOK is expected to maintain its easing stance amid signs of weakening economic fundamentals," Kyobo Securities analyst Baek Yoon-min said.

"However, considering that the key rate may already be near the effective lower boundary, the BOK will likely focus on unconventional measures, such as purchasing state bonds, instead of monetary policy steps, such as a rate cut, to support the economy," Baek added.

In its latest growth estimate, published late May, the BOK forecast the local economy to contract 0.2 percent from a year earlier in 2020, marking its first negative growth since 1998 and only the third in its history.

Such an outlook was still based on an assumption that global economic conditions will not further deteriorate following a second spike in COVID-19 infections, which may already have been proven wrong.

The U.S. is daily renewing its record of new infection cases with over 60,000 new cases added each day to its caseload, which now sits at over 3.2 million.

Globally, the total number of infection cases has topped 12 million.

Under such a case -- worsening global economic and trade conditions caused by a second wave -- the BOK estimated the local economy to shrink as much as 1.8 percent this year.

But the problem is the BOK may have nearly used up its traditional and existing policy measures to support the economy.

South Korea's policy rate still sits higher than those of major economies, including the U.S., but an additional rate cut is feared to trigger an exodus of foreign investment, which in turn may create other and possibly more serious problems, including a stock market crash.

A BOK board member has highlighted such a possibility.

"One of the members expressed an opinion that now may be the time to discuss the introduction of nontraditional policy measures, such as quantitative easing, noting that the key rate appears to be very close to the effective lower boundary already," minutes from the BOK's rate-setting meeting in May said.

In this photo, taken May 28, 2020, a large shopping mall in Seoul is nearly deserted amid the continued effects of the new coronavirus outbreak. (Yonhap)

The BOK too has stressed the need for new, unconventional ways to support the economy, launching a new program late last month to inject additional foreign currency into the local market by purchasing foreign currency-denominated bonds held by local banks and other financial institutions.

"As part of efforts to secure new policy measures, the Bank of Korea and the finance ministry are moving to introduce a new foreign currency supply system by purchasing foreign currency bonds under repurchase agreements," it has said.

bdk@yna.co.kr
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