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Korea Monetary Policy May 2020

Korea: BOK chops rates to a fresh all-time low at the end of May, slashes economic forecast

On 28 May, the Bank of Korea (BOK) voted to lower the base rate from 0.75% to 0.50%, as markets had anticipated and also representing the lowest rate in the Bank’s history.

The Bank’s decision to cut rates was due to bleak economic data and a desire to counter disinflationary pressures. The Bank noted that global economic activity has taken a severe hit due to Covid-19 and related containment measures. Domestically, the Bank reiterated the economy has weakened considerably, and reduced its 2020 GDP estimate from 2.1% growth to a 0.2% contraction. Moreover, the Bank expects global economic output and financial markets to remain hampered due to uncertainty around Covid-19 and a possible second flare-up of cases. On the inflation front, the Bank highlighted soft consumer price pressures due to noticeably lower energy prices and frail demand-side inflationary pressures, and noted that consumer price expectations are below 1%.

Going forward, the Bank stated it would maintain an accommodative monetary stance. The majority of our panel expects the BoK to remain on hold for the rest of this year and next year, with rates likely now close to their effective lower bound.

Commenting on the BOK’s decision, Robert Carnell, an economist at ING, noted:

“Even though conventional monetary policy may have reached its limits, it was not clear that the BoK was gearing up for a substantial move towards Quantitative Easing […] A more reasonable interpretation is that the BoK is now taking a back seat to the government and anticipating a more forceful fiscal response to provide the bulk of ongoing support for the economy.”

The next monetary policy meeting is set for 16 July.

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