[Q&A] Lee Ju-yeol "Real Economy Shrinks Due to COVID-19... Actively Purchasing Government Bonds if Necessary"

May Monetary Policy Committee Press Conference "Base Interest Rate Approaching Effective Lower Bound"

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] Lee Ju-yeol, Governor of the Bank of Korea, stated regarding the significant increase in government bond issuance due to the 3rd supplementary budget (supplementary budget) that "if the volatility of long-term interest rates expands, we plan to actively purchase government bonds as necessary to stabilize the market."

Governor Lee said at a press conference after the Monetary Policy Committee meeting held at the Bank of Korea headquarters in Seoul on the 28th, "We expect the issuance volume of government bonds to increase significantly due to the 3rd supplementary budget." However, he added that the specific scale will be decided considering the financial market situation and the supply and demand of government bonds.

At the Monetary Policy Committee meeting that day, the Bank of Korea lowered the base interest rate from 0.75% to a record low of 0.5%. The Bank of Korea also revised its economic outlook, forecasting a growth rate of minus (-0.2%) for this year.

The following is a Q&A with Governor Lee.

▲At the April Monetary Policy Committee meeting, the outlook was based on the scenario that the COVID-19 situation would calm down in the second quarter and improve in the second half of the year. What is the background for the current negative growth forecast? Besides the baseline scenario, what are the best and worst forecast figures?

=The baseline scenario assumes that the number of new and existing global confirmed cases will peak in the second quarter and then gradually enter a calming phase. Although there may be localized outbreaks domestically, large-scale re-spread is not expected. In major advanced countries, the spread of COVID-19 appears to be somewhat calming. However, confirmed cases are increasing mainly in emerging countries, including South America. Under the pessimistic scenario, the negative growth rate is expected to be relatively large.

▲You mentioned last year that the US-China trade dispute reduced our economic growth rate by 0.4 percentage points. What impact does the recently intensified US-China conflict have on our economy?

=The US-China conflict increases global economic uncertainty, negatively affecting investment and trade, which will significantly constrain export recovery. Although tensions are escalating mainly around trade issues between the two countries, it is currently difficult to predict whether the conflict will concretize and, if so, what measures and intensity will be taken. Therefore, we did not specifically reflect this in our forecast figures but consider it a downside risk. Depending on how the US-China conflict unfolds, it could have a considerable impact on our export-dependent economy. We are paying close attention to this as a major risk.

▲There are expectations that market interest rates will surge due to the government's large increase in deficit bond issuance. Are there any additional plans for market stabilization measures such as government bond purchases?

=The Bank of Korea is paying close attention to market instability caused by supply-demand imbalances. We are considering various available market stabilization measures. If the volatility of long-term interest rates expands or is likely to expand, we will promptly and actively implement market stabilization measures such as expanding government bond purchases. Regarding purchase plans in the issuance market, most major central banks purchase government bonds primarily in the secondary market, and direct underwriting or purchases in the issuance market are mostly prohibited by law and only conducted in exceptional cases. Strict prohibition of direct underwriting or issuance market purchases is because such actions are perceived as a lack of fiscal expansion capacity, lowering confidence in fiscal soundness. It could also lead to controversy over monetizing government debt. Therefore, most countries prohibit or restrict direct underwriting or issuance market purchases. The Bank of Korea also believes that if supply-demand imbalances arise due to government bond issuance, market stabilization measures should be taken in the secondary market.

▲Can the Bank of Korea's purchase of government bonds be interpreted as quantitative easing?

=Whether it is quantitative easing or not is not considered a very important issue. Simple government bond purchases are measures taken to stabilize the market in response to market instability. This differs somewhat from the large-scale quantitative easing by major countries aimed at further lowering long-term interest rates to ease monetary policy.

▲Is there a concern that unprecedented liquidity supply and record low interest rates could deepen asset inflation and lead to wealth disparity?

=Under normal circumstances, such concerns could exist. However, when the economy is very sluggish as it is now, the economic downturn shock mainly concentrates on vulnerable groups. In such situations, it is essential for fiscal and monetary policies to actively prevent income reduction among vulnerable groups and raise the growth rate.

▲What role should fiscal policy play in the current situation?

Given the unprecedented crisis caused by the spread of infectious diseases and the resulting contraction of the real economy, it is necessary to operate fiscal policy expansively to protect vulnerable groups and struggling companies and to safeguard domestic jobs.

▲If the US Federal Reserve introduces negative interest rates, can the Bank of Korea lower the base rate to 0%? Are you preparing for other policy tools such as quantitative easing or yield curve control?

=The effective lower bound is variable, depending on major countries' interest rates and domestic and international financial and economic conditions. With this rate cut, the base rate is considered close to the effective lower bound. If the US Federal Reserve lowers rates to negative levels, the effective lower bound could change, which would increase our policy room.

▲Monetary Policy Committee member Cho Yoon-je did not attend the meeting due to controversy over stock holdings. This issue has occurred twice consecutively. Were there no internal guidelines at the Bank of Korea regarding stock disposal?

=Monetary Policy Committee members are subject to asset disclosure under the Public Officials Ethics Act. Upon appointment, they are informed of relevant laws and procedures. According to the Public Officials Ethics Act, if a disclosed asset holder owns stocks worth more than 30 million KRW, they must sell them, place them in a blind trust, or request a job-relatedness review. Member Cho has requested a job-relatedness review and is complying with all legal procedures regarding stock holdings.

▲What is the Bank of Korea's role concerning the Special Purpose Vehicle (SPV) for purchasing non-investment grade corporate bonds?

=Funding support for the SPV is provided under Article 80 of the Bank of Korea Act, which requires investigation and confirmation of the business and asset status of the relevant companies when providing emergency credit. We plan to actively fulfill the necessary roles for SPV operation in line with the law's intent. We will continue to consult with government authorities on specific measures.