(Updated with quotes from BOK governor and market data)
[Photo provided by Bank of Korea]
The Bank of Korea on Thursday projected an economic contraction this year could be deeper than the previously expected 0.2 percent, but the bank would have to employ non-rate means to support the economy since the key rate already in the zero range has been inflating asset prices.
The Bank of Korea in the monetary policy meeting on Thursday kept the benchmark rate steady at 0.5 percent after the last cut of a quarter percentage point in May that brought the base rate to a fresh historic low in the face of recession dangers from virus fallouts.
Korea’s gross domestic product (GDP) growth this year is estimated to fall below the May estimation of 0.2 percent decline, due to slow recovery of domestic consumption and exports, the bank said in the minutes. Korea would experience its first economic contraction since the 1997-1998 Asian financial crisis.
“Given the renewed spread of COVID-19, it is uncertain exports which the Korean growth largely hinges on will pick up in the second half. At worst, we projected negative 1.8 percent growth this year, but we do not think we would go that far,” BOK Governor Lee Ju-yeol said in video press conference.
The BOK has put the growth rate for the first half at negative 0.5 percent, which would mean a decline of more than 2 percent in the second-quarter GDP versus the first quarter that experienced a 1.3 percent fall. A negative growth for two consecutive quarters places an economy in a technical recession. The BOK releases preliminary second-quarter GDP figures on July 23.
“The base rate is already near its permissible low. If more stimuli are needed, we would have to employ other means than a rate cut such as loan and bond purchases,” he said.
Rate inaction was widely expected as the excess money from an additional cut could stoke more risk of a housing bubble and upset the government’s battle with runaway housing prices with heavier taxes on property ownership.
The country’s M2 monetary supply surged by another record monthly pace of 35.4 trillion won ($29.5 billion) to reach 3,053.9 trillion won by May after adding 34 trillion won in April. Record fluid money has led to frenzied housing and stock purchases.
The move went unnoticed by the markets.
The main Kospi finished Thursday down 0.82 percent at 2,183.76. The three-year government bond yield fell 0.1 basis point to 0.846 percent by midday. The five-year yield traded 0.6 basis point lower at 1.142 percent and the 10-year 0.1 basis point higher at 1.415 percent.
Lee projected the record fiscal spending through three extra budgets is expected to aid the GDP by 0.1-0.2 percentage point.
A third extra budget of record 35.1 trillion won was passed by the parliament early this month. The government has already used up two increased budgets worth 11.7 trillion won and 12.2 trillion won.
By Lee Ha-yeon
[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]