Bank of Korea drops rate, tips negative growth for 2020

May 28, 2020

SEOUL - South Korea's central bank, Bank of Korea, today lowered its 2020 growth forecast from 2.1% to -0.2%. A negative reading would mark the first annual contraction since 1998. The bank now sees an inflation reading of just 0.3% (previously tipped at 1.0%) for this year. The bank also cut the interest rate by 25 basis points to 0.50%.

For 2021, the BoK is projecting growth and inflation at 3.1% and 1.1% respectively (down from its previous projection of  2.4% and 1.3%).

ANZ Bank says Korea's growth environment remains challenging, with the outlook highly uncertain.

"While South Korea's latest consumer and business sentiment prints edged up, they still point to very sluggish domestic demand, which could come under renewed downward pressure should new COVID-19 cases rise again," it says.

"Exports have also been struggling, with data for the first 20 days of May showing a 20.3% y/y drop. With global economic activities restarting only very gradually, export weakness is unlikely to abate meaningfully in the short term.

"To compound matters, rising US-China trade tensions add another dimension of risk to the global trade outlook. The combination of weak economic activity and low oil prices in turn raises the threat of deflation."

ANZ says further policy support is on the cards, but the appetite for conventional rate cuts is diminishing as the policy rate approaches the 'zero' bound.

Notably, the accompanying policy statement reiterated an accommodative monetary policy stance, but removed a phase that the BoK would "judge whether to adjust the degree of monetary policy accommodation", ANZ says.

In a press briefing, BoK Governor, Lee Ju-yeol, also stated that the policy rate was now near its effective lower bound. Instead, ANZ says, the focus will be on non-interest rate tools.

The Governor signalled that the central bank may be more active in Government bond buying, given the Government's fiscal push (a third budget reportedly to the tune of KRW40trn -- 2% of GDP -- is in the works, says ANZ), but direct purchases were ruled out, and there was no commitment to a regular purchasing programme.

www.live.anz.com (ATI).