[Q&A] Lee Ju-yeol "Micro Policies More Effective Than Interest Rates in COVID-19 Response"

Bank of Korea Lowers Growth Forecast to 2.1%
Base Interest Rate Held Steady at 1.25% per Year

[Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] Lee Ju-yeol, Governor of the Bank of Korea, stated on the 27th that economic measures in response to the novel coronavirus infection (COVID-19) are more effective when selectively supporting vulnerable sectors through micro-policies rather than adjusting interest rates.

At a press conference held after the Monetary Policy Committee meeting that day, Governor Lee said, "The Bank of Korea has decided to support companies affected by COVID-19 through its own loan program," adding, "This measure is expected to provide considerable relief in interest payments for self-employed individuals and small and medium-sized enterprises struggling due to COVID-19."

The Bank of Korea lowered its growth forecast for this year by 0.2 percentage points from the previous 2.3% to 2.1%, reflecting the impact of COVID-19. However, the base interest rate was kept steady at 1.25% per annum.

Governor Lee emphasized, "The household loan growth rate remains high, and we cannot confidently say that housing prices have stabilized," and noted that they will also monitor side effects from any interest rate cuts.

However, the Bank of Korea also projected the possibility of negative growth in the first quarter due to the current situation. Governor Lee stated, "The unexpected outbreak of COVID-19 has led to a contraction in consumption and disruptions in production activities, causing difficulties," adding, "Economic forecasts inevitably rely on assumptions about COVID-19, and these were made on the premise that COVID-19 would peak in March and gradually subside thereafter." He further explained, "Although the situation may vary depending on how events unfold, the most significantly affected area is the contraction in consumption," and "Since the shock is expected to be concentrated largely in the first quarter, there is a possibility of negative growth during this period." He identified tourism, food and accommodation, and wholesale and retail trade as the sectors most severely impacted among service industries.

Below is a Q&A session with Governor Lee.

▲ Concerns about COVID-19 have intensified. Have you considered lowering the base interest rate to 0%? How much impact do you think last autumn's rate cuts had on economic recovery?

= It is true that the uncertainty of the growth path has increased due to the spread of COVID-19. However, with the current base rate at 1.25%, there is no need to consider lowering it to 0%. The Bank of Korea cut the base rate twice last year, in July and October. We believe that the rate cuts have been smoothly transmitted to the financial markets. Although it is difficult to quantify immediately, we judge that it has had a positive effect on the real economy. Considering that the primary transmission channel?the financial market?was effectively influenced, it likely contributed positively to economic recovery.

▲ You have lowered this year's economic growth forecast to 2.1%. To what extent does this reflect the impact of COVID-19?

= Annual economic growth forecasts must be based on assumptions about how the COVID-19 situation will develop and how widely it will spread. It is true that the real economy is currently experiencing contraction due to COVID-19, and we expect the shock to be greater than at any previous time. However, this impact will be especially concentrated in the first quarter.

▲ The supplementary budget bill has been formalized. Some argue that interest rates should be lowered alongside the supplementary budget.

= Given the current state of COVID-19, the economic difficulties stem from a health and safety crisis. In such circumstances, micro-policies that selectively support the self-employed and businesses are more effective than interest rate cuts. The government is preparing various micro-policies, including fiscal support. The Bank of Korea, recognizing this, has increased the limit of its financial intermediation support loans by 5 trillion won to support companies.

▲ Has your outlook on semiconductor industry recovery changed before and after the COVID-19 outbreak? Is there a possibility of negative growth in the first quarter?

= In January, considering leading indicators related to the semiconductor industry, we expected the semiconductor market to enter a recovery phase around mid-year. However, after observing the situation for about a month following the COVID-19 outbreak, we currently understand that semiconductor production has not been disrupted. Nonetheless, concerns about the semiconductor market are growing. We have not yet identified significant changes that would require revising our existing forecast, but we are concerned that the recovery timing could be affected depending on the extent of COVID-19's spread. If the COVID-19 situation worsens or prolongs, demand from upstream industries such as mobile phones may weaken, or production disruptions could delay semiconductor market recovery. Consumption is the most severely contracted area due to COVID-19, followed by tourism, food, accommodation, wholesale and retail trade, and service industries, which are directly impacted. Although the situation may change depending on developments, since the shock is expected to be largely concentrated in the first quarter, there is a possibility of negative growth during this period.

▲ Consumer sentiment indices and consumer survey indices released so far show overall damage due to COVID-19. If these indicators worsen further, what about monetary easing policies?

= Whether to cut the base interest rate will be decided by closely monitoring whether the COVID-19 situation unfolds as we have forecasted or if it prolongs further. In this process, we will carefully consider changes in financial stability, the effects and side effects of interest rate adjustments, and other related factors.

▲ Central banks in countries like Australia have been discussing quantitative easing. Besides the base interest rate, can you use non-policy tools? What options are available?

= It is true that uncertainty about the growth path has increased due to the spread of COVID-19. However, considering the current base interest rate level, we believe there is still room to respond if necessary. We have increased the limit of our interest rate intermediation support loans, which can be used as needed. We also have traditional policy tools beyond interest rates. It seems you are referring to quantitative easing used by major advanced country central banks, but we believe it is not yet the stage to consider such measures. However, we need to prepare for the possibility that our interest rate policy room may shrink depending on future developments. We are currently conducting related research and will consider measures to prepare for when interest rate policy space diminishes, referencing studies from other countries as well.

▲ There are criticisms that low interest rates have fueled real estate overheating and rapid household loan growth. Some interpret that loan increases due to rate cuts will not occur.

= The government has implemented many measures for the real estate market. It has strengthened macroprudential policies and made various efforts. While there is a time lag before these take full effect, the household loan growth rate remains high. Also, we cannot confidently say that housing prices have stabilized. Financial stability cannot be ensured solely by the government's macroprudential policies. Loan regulations and credit controls are useful macroprudential measures for financial stability, but they alone do not guarantee it. Macroprudential policies have their limitations.

▲ If the COVID-19 situation worsens beyond the current level, is there a plan to hold an emergency Monetary Policy Committee meeting?

= There have been cases of interest rate adjustments through emergency Monetary Policy Committee meetings outside the regular schedule, such as after the 2008 global financial crisis. The Bank of Korea is prepared to take timely necessary measures according to changing circumstances. Although uncertainty is high, we do not currently consider it necessary to contemplate or discuss emergency meetings.

▲ In past cases, interest rate cuts followed the financial intermediation support measures in 2013 and 2014. Can we expect a similar sequence now?

= The situation now is different from then. It is not logical to assume that what happened then will necessarily happen now.