[Q&A] Lee Ju-yeol "Growth Rate in the 1% Range This Year Is Not Easy... There Is Room for Interest Rate Adjustment"

"When Interest Rates Fall in Developed Countries, South Korea's Effective Lower Bound May Decrease"

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] Lee Ju-yeol, Governor of the Bank of Korea, on the 9th forecasted that South Korea's annual economic growth rate this year will be at the 0% level.

After concluding the Monetary Policy Committee meeting that day, Governor Lee said at a press conference, "Although uncertainty is very high, we believe it will not be easy for the growth rate to reach the 1% level." Earlier, the Bank of Korea had lowered its growth forecast for this year from 2.3% to 2.1% in its economic outlook released in February.

Regarding the possibility of additional interest rate cuts, Governor Lee explained, "Since there is room for interest rate cuts, we will respond with policy measures according to the situation." He added, "The effective lower bound can also decrease depending on how advanced countries decide their interest rates."

Below is a Q&A with Governor Lee.

▲Do you think growth at the 1% level is possible?

=It is no exaggeration to say that the global economic trend depends on the development of the novel coronavirus disease (COVID-19). Depending on how the situation progresses, forecasts can vary widely. Some investment banks (IBs) have even projected negative growth rates, but when consulting economic and health experts, we expect economic activities to gradually improve in the second half of the year. If this scenario holds, we anticipate positive growth. However, we believe it will not be easy to reach the 1% level.

▲Do you expect the COVID-19 crisis to have a more severe impact than the past financial crisis?

=The COVID-19 crisis is spreading worldwide at a faster pace and with greater intensity than expected, and all countries are facing domestic demand slumps. We see a very high possibility of a global economic recession. Since this economic downturn is not limited to certain countries or regions but is experienced by all countries worldwide, we believe the shock will be much stronger than during the past financial crisis. Our economy will also not be spared from difficulties. The basic scenario assumes that if the COVID-19 situation calms down within the second quarter, economic activities will gradually improve starting in the third quarter (second half). Under this assumption, we expect the domestic economy to achieve positive growth this year.

▲Does the quarterly decline in growth rate act as a factor for additional interest rate cuts? Is there room for further rate cuts in May?

=Since the base interest rate was lowered significantly last month, it is true that the policy room has decreased. However, considering the concept of the effective lower bound, which is not fixed at a certain level but variable, if interest rates in advanced countries fall, our effective lower bound can also decrease. Keeping this in mind, there is indeed room for policy response through interest rate adjustments. We will respond with appropriate policy measures according to the situation regarding additional rate cuts in May.

▲You previously mentioned reviewing loans to non-bank financial institutions. How much discussion has taken place?

=Depending on the severity of the crisis, there is a need to temporarily implement a system that provides loans to securities companies participating in the corporate bond market using high-quality corporate bonds as collateral. We are currently preparing such measures. Bank of Korea and government officials are consulting on this.

▲Is there any consideration of adopting the corporate bond and commercial paper purchase method through a special purpose vehicle (SPV) as implemented by the U.S. Federal Reserve (Fed)?

=Establishing a special purpose vehicle for direct purchases requires government approval, as lending to specific companies is an extraordinary measure beyond the usual functions of a central bank. Government consent is necessary. Currently, the corporate bond and commercial paper (CP) markets are relatively stable. We are monitoring the situation together with the Financial Services Commission and share the same judgment. The Fed's establishment of an SPV under government guarantee is considered highly effective. While special loans to non-financial institutions are being arranged, there are certain limitations and constraints.

▲There are calls for the Bank of Korea to directly supply liquidity by purchasing corporate bonds.

=Direct purchase of corporate bonds is legally restricted. If necessary to stabilize government bond supply and demand, we plan to actively purchase government bonds. It is expected that government bond issuance will increase to secure supplementary budget funds for COVID-19 response. I understand that the government bond purchase plan will be announced this afternoon.

▲What are your thoughts on Lee Dong-geol, President of the Korea Development Bank, criticizing the Bank of Korea's response as complacent?

=The Bank of Korea and all Monetary Policy Committee members recognize that the domestic and international financial situation is very severe. We believe the shock surpasses that of the 2008 financial crisis, and we are implementing various policies not previously undertaken. However, we can only take measures within the authority and scope granted to the central bank. Because of this, there seems to be a gap between market expectations and our actions. The Bank of Korea is making every effort to revive the struggling economy and will continue to do so.