Bank of Korea Monetary Policy Board 'Monetary Policy Direction Decision Meeting' Results
Economic Recovery Slows Down, External Uncertainties Increase... Low Interest Rates Maintained
[Asia Economy Reporter Jang Sehee] The Bank of Korea has kept the base interest rate steady at 0.50% per annum. This is interpreted as a decision to maintain a low interest rate stance for the time being while monitoring the situation amid a delayed economic recovery in the second half of the year due to the novel coronavirus disease (COVID-19) and increasing uncertainties in external factors. Criticisms that excessive liquidity only inflates asset prices such as real estate, as well as the effective lower bound, are cited as reasons why the base rate could not be lowered further.
The Monetary Policy Board of the Bank of Korea held a meeting on the 16th, chaired by Governor Lee Ju-yeol, and decided to keep the base interest rate at 0.50% per annum. Previously, at the Monetary Policy Board meeting on May 28, the Bank of Korea lowered the base rate from 0.75% to the historic low of 0.5%.
The fact that the shock from COVID-19 has not yet fully recovered is part of the reason the Monetary Policy Board has maintained the low interest rate stance. Governor Lee Ju-yeol stated in a speech commemorating the 70th anniversary of the Bank of Korea last month, "Monetary policy needs to be operated accommodatively until our economy shows signs of recovery."
The Federal Reserve (Fed) of the United States announcing that it will maintain zero interest rates until 2022 is also analyzed as having influenced the decision to keep rates steady. When major countries like the U.S. maintain rates at the lowest levels, the Bank of Korea faces less pressure to raise rates. Narrowing the interest rate gap with key currency countries could lead to issues such as foreign currency outflows.
There is also a policy mix aspect related to the government's real estate stabilization policy. On the 10th, when announcing real estate measures, Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki indirectly stated that the Bank of Korea's rate cuts had influenced the rapid rise in real estate prices and that rates should not be lowered further. Deputy Prime Minister Hong said, "Various economic conditions and factors determining interest rates are intertwined, so the Bank of Korea has made an appropriate judgment, but interest rates may be considered in connection with the real estate market." Governor Lee also responded to a question about the relationship between low interest rates and housing prices by saying, "In determining housing prices, various factors besides interest rates are at play," but added, "Accommodative financial conditions lower household costs, which can act as a factor increasing housing demand."
Another reason for keeping the rate steady is to observe the effects of policies such as the execution of the third supplementary budget (추경). However, the Bank of Korea is closely monitoring the possibility that the issuance of deficit government bonds due to the supplementary budget could lead to a rise in government bond yields. Governor Lee stated after the May Monetary Policy Board meeting, "We are closely watching the possibility of market instability if a large amount of government bonds is issued," and added, "If long-term interest rates fluctuate, we will actively purchase government bonds to stabilize the market."
Meanwhile, the Monetary Policy Board meetings to decide the base interest rate within this year remain three times: August 27, October 14, and November 26.
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