Deputy Governor of BOK: "New Coronavirus, Too Early to Cut Base Rate... US Base Rate Hold Matches Expectations (Comprehensive)"

FOMC Unanimously Holds Benchmark Interest Rate at 1.50~1.75%

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] Yoon Myeon-sik, Deputy Governor of the Bank of Korea, said on the 30th regarding the possibility of an interest rate cut due to the spread of the novel coronavirus infection (Wuhan pneumonia), "I think it is too early to lead to expectations of a base rate cut."

Deputy Governor Yoon made these remarks on the morning of the same day after presiding over a situation review meeting related to the U.S. Federal Reserve's (Fed) interest rate decision at the Bank of Korea headquarters and meeting with reporters.

He emphasized, "SARS (Severe Acute Respiratory Syndrome), MERS (Middle East Respiratory Syndrome), and the novel coronavirus are not factors to consider the base interest rate by themselves; we need to look at the overall impact as well as the underlying inflation and financial conditions," adding, "It is difficult to respond preemptively and immediately."

He also added, "At that time, not only infectious diseases but also the economic and inflation situations were unfavorable, which was a factor in lowering interest rates."

Deputy Governor Yoon said, "I believe (the novel coronavirus) will be reflected in growth rates, inflation, and the current account balance, but it is still difficult to say to what extent due to ongoing uncertainties." According to the Korea Institute for International Economic Policy (KIEP), SARS is estimated to have reduced South Korea's GDP growth rate by about 1 percentage point in the second quarter of 2003. The impact of MERS caused South Korea's GDP to decrease by 0.2 percentage points in 2015. However, experts say that in the case of SARS, the impact of the credit card crisis at that time was also significant, so simple comparisons are difficult.

Deputy Governor Yoon stated, "We will continue to closely monitor market conditions resulting from the spread of the novel coronavirus and watch with caution the impact it may have on our economy going forward."

Regarding the Fed's decision on the 29th (local time) to maintain the current base interest rate at 1.50?1.75% through the Federal Open Market Committee (FOMC), he explained, "The rate freeze itself is in line with market expectations." The Fed unanimously kept the federal funds rate (FFR), the monetary policy benchmark rate, at 1.50?1.75%.

However, he expressed, "After Fed Chair Jerome Powell's press conference, the rate decline widened and stock prices fell; it seems the market interpreted Chair Powell's press conference as dovish (favoring monetary easing)." Chair Powell evaluated that uncertainty related to trade policy remains high and expressed concerns about the novel coronavirus, which led to the market's reaction. He also said, "Our financial market is generally heavily influenced by the U.S. market, so it will be similarly affected."

In its statement, the Fed changed its view on inflation from the previous symmetrical 2% 'near' to 'returning to.' Regarding this, Deputy Governor Yoon said, "Chair Powell stated in the press conference that this change was made because the previous wording could be misinterpreted, so I think the Fed's stance has not significantly changed compared to before."

Regarding the domestic impact of Brexit, he explained, "Currently, there are many other major uncertainty issues besides Brexit," adding, "It's not that we are completely ignoring the Brexit issue, but relatively, the concern is not as large as before."