[Q&A] Bank of Korea: "Global Trade Environment Worse Than Previous Scenarios"

Monetary and Credit Policy Report Briefing in March

On the 13th, the Bank of Korea stated that the global trade environment triggered by Trump is moving toward a somewhat worse situation than the (basic) scenario they had presented. However, regarding whether to revise the economic growth forecast or decide on an earlier-than-expected base interest rate cut, they took a cautious stance, saying that a mid-term review should be conducted before the monetary policy direction meeting next month.

Park Jong-woo, Deputy Governor of the Bank of Korea, is speaking at the March Monetary and Credit Policy Report briefing held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 13th. Provided by the Bank of Korea.

At the monetary and credit policy report briefing on the same day, Park Jong-woo, Deputy Governor of the Bank of Korea, said, "It is clearly difficult to say that the current situation is heading toward an optimistic scenario." The Bank of Korea had released economic growth forecasts last month based on scenarios divided into basic, optimistic, and pessimistic, reflecting the impact of U.S. tariff policies. Under the basic scenario, the growth rate for this year was estimated to decrease by 0.1 percentage points, which was reflected in the February forecast (1.5% growth rate for this year).

Deputy Governor Park explained, "We see the situation moving toward a somewhat worse condition than the basic scenario. It is true that uncertainty has increased compared to the basic scenario. However, it is premature to say that we are heading toward the pessimistic scenario." He added, "It is still too early to judge whether the growth forecast path should be changed. We will conduct a mid-term review based on additional information obtained before the Monetary Policy Board meeting next month."

Below is a Q&A session.

- When you announced the basic scenario last month, you strictly reflected the U.S. tariff policy and explained that next year could be rather optimistic. What specific events in the two weeks after the announcement have made the situation more uncertain than the basic scenario?

▲ At that time, we strictly reflected the impact on steel, aluminum, automobiles, semiconductors, etc., averaging all effects. The part that has become stronger is the U.S. tariffs on China. We had assumed a 10% tariff, but it is moving toward 20%, which is stronger than the previous forecast. However, although it is stronger than the basic scenario, it is not significantly deviating from it. Nevertheless, since tariffs have been imposed, postponed, and there is a possibility of retaliatory tariffs, uncertainty is indeed increasing. The situation is rapidly changing day by day, so we are monitoring closely to see how it will unfold.

- With increasing variables, is there a possibility that the timing of the base interest rate cut will be earlier?

▲ There are certainly several risk concerns regarding growth. However, it is not yet the time to decide whether to bring forward the monetary policy stance at this point, two weeks after the last Monetary Policy Board meeting. The board members will carefully consider and decide on the future direction of monetary policy operations.

- You explained that the three base interest rate cuts have already been priced into long-term interest rates, so the effect has been significant. If rates continue, do you think the effect will diminish? Wouldn't that be like a shell game?

▲ When we said it was priced in, it means that among various monetary policy transmission effects, the effect on long-term interest rates was significant. Since the short-term interest rate impact should also be considered beyond the priced-in part, it is unreasonable to say the effect will be limited.

- Since the base interest rate has been priced in, is it likely that market interest rates will now trend upward?

▲ Many factors influence long-term interest rates. It is difficult to say that the decline in rates has ended and will rise solely based on monetary policy expectations. However, since the base interest rate has been relatively priced in, the room for further decline is somewhat limited.

- The analysis of the base interest rate cut effect suggests that the economic stimulus effect through improved sentiment will be constrained. Without improved sentiment, wouldn't the side effects of the rate cut be greater?

▲ Uncertainty has caused sentiment to contract. It is true that the effect of the base interest rate cut on sentiment is limited. One reason for cutting the base interest rate is to alleviate this. There is definitely a need for additional rate responses for growth, but this always involves a trade-off with financial stability side effects. Considering this, the speed and extent of monetary policy will be determined.

- How did the base interest rate cut affect market interest rates and sentiment in the past?

▲ On average, in the past, long-term interest rates began to decline about 4-5 months before the base interest rate cut, showing a downward trend of about 40-50 basis points. This time, rates started to decline more rapidly about a year ago, falling by up to 100 basis points by the time of the base rate cut. Therefore, the effect was judged to be greater. However, due to global trade environment uncertainty and domestic consumption sentiment contraction, the impact on corporate investment and consumption is considered smaller than before. If these factors ease, the effect is expected to expand.

- Is there a possibility that household debt growth will accelerate due to the base interest rate cut?

▲ In some areas of Seoul, housing prices are rising sharply, and the biggest concern is the spread to surrounding areas. Apartment transaction volume in Seoul in February also increased more than expected. Increased transactions have historically influenced household debt growth with a time lag. The report stated that the increase was stable until February, but since it could affect the future, it is uncertain whether the current assessment will be maintained. We are carefully monitoring the possibility of further household loan increases. The financial authorities firmly hold the position that the pace of household loan growth should not exceed GDP growth and, ideally, should be gradually reduced. If concerns arise, various policy measures will be taken. All these factors will be considered in monetary policy.

- Please explain the new financial conditions index included in this report.

▲ To determine the monetary policy stance, indicators such as the financial conditions index, neutral interest rate, and inflation trends are used. Among these, the financial conditions index itself has high uncertainty, so this time, an alternative index was additionally presented to comprehensively assess the situation. Based on both the existing and newly published indices, financial conditions are generally at a neutral level. According to the index, the current financial situation is already neutral, but the current interest rate is estimated to be at the upper end or close to the range of the neutral interest rate. From the perspective of neutral interest rate conditions and economic stimulus, there is still room for interest rate cuts.