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(EDITORIAL from Korea Times on July 17)

Editorials from Korean Dailies 07:05 July 17, 2020

Interest rate freeze
Economy likely to contract further than expected

The Bank of Korea (BOK) decided to leave its key interest rate unchanged at 0.5 percent Thursday. This decision lived up to market expectations of a rate freeze.

The move reflects worries that a further rate cut could do more harm than good to the economy. So it can be said that the central bank has taken a realistic step to avoid the side effects of a lower interest rate ― soaring housing prices and a bullish stock market.

That is why all seven members of the BOK's Monetary Policy Board unanimously agreed to the rate freeze. In fact, the central bank has little room to lower the rate further after reducing it twice by 0.75 percentage points to a record low of 0.5 percent amid the COVID-19 pandemic in the first half of the year. The rate was cut by 0.5 percentage points in March and 0.25 percentage points in May.

The BOK also felt little need for a further rate reduction. It pointed out that the lifting of lockdowns and restarting of business activities in many countries would ease concerns about a global economic recession. However the central bank painted a bleaker picture for the Korean economy. It predicted that the country will suffer a steeper contraction this year than its May projection of a 0.2 percent contraction.

The downside factors are mainly a continued slide in domestic consumption and exports ― a key growth engine for Korea. The BOK fears that a rebound in consumption and exports may come far more slowly than anticipated. Facility investment has also dwindled due to the severe economic fallout from the coronavirus pandemic.

Let's look at the disappointing economic data. The nation's exports shrank 10.9 percent in June from a year ago, marking a four-month downward march. Somewhat encouraging is that the figure was an improvement from a contraction of 23.7 percent in May and 24.5 percent in April.

Massive job losses are another problem. The country lost 352,000 jobs last month, the fourth straight monthly fall in the number of employed people. The job situation plunged to the worst level since October 2009. More worrisome, it shows no signs of a quick improvement as the public health crisis persists here and abroad.

BOK Gov. Lee Ju-yeol knows about the gloomier prospects better than anyone else. He said the world has yet to face the worst case, expecting that economic conditions have aggravated further than anticipated earlier. The BOK predicted that the Korean economy may shrink by 1.8 percent this year in the worst-case scenario if a second wave of COVID-19 infections hits the world in the coming fall and winter.

In this situation, the central bank has pledged to maintain its policy of monetary easing despite a bubble forming in the housing market. Instead of cutting the interest rate, the BOK plans to focus on such measures as the purchase of state bonds through open market operations as well as easing rules on bank loans. It is required to form a timely and proper monetary policy to help overcome the virus-driven crisis and stimulate the economy.

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