South Korea’s central bank on Thursday turned more pessimistic about this year’s economy but kept the policy rate steady, choosing to wait out the effects of the planned fiscal stimulus to save policy ammunitions.
“I want to make it clear that if the economy grows within our expectations, we won’t study a rate cut,” Bank of Korea (BOK) Governor Lee Ju-yeol said after presiding over the April policy meeting.
The BOK, however, cut its outlook for this year’s economic growth to 2.5 percent from the 2.6 percent estimated in January. The inflation target was also shaved to 1.1 percent from 1.4 percent.
The 2.5 percent growth rate would be the lowest after the 2.3 percent recorded in 2012.
His statement came after the bank’s monetary policy board decided to hold the benchmark rate steady at 1.75 percent, a level maintained since November 2018 when the key rate went up by 25 basis points.
Regardless of Lee’s comments, the market continued to bet on lowered rates, seeing the rationale for a rate cut to become stronger if the economy underperforms.
The yield on the three-year bond closed Thursday down 3.7 basis points at 1.741 percent, below the policy rate, and the five-year note yield 4.7 basis points lower at 1.776 percent.
Lee struck down fears of a protracted deflation despite inflation slipping into zero territory. The country’s headline inflation in March rose a mere 0.4 percent from a year earlier, hovering in the zero zone for the third straight month and slowing to its weakest pace in nearly three years amid softening oil prices and subdued demand.
Lee indicated the central bank would wait out the effects of the fiscal expansion before taking further action.
“Fiscal spending will increase through supplementary budgeting and aid growth amid improvement in trade and investment,” he said.
The government is readying a package of an extra budget in the scale of 6 to 7 trillion won ($6.16 billion) for legislative approval in May. The central bank is expected to factor in the effects of the stimulus when it releases its next economic forecasts in July.
Lee also denied the option of redenomination of the Korean currency amid calls for more radical action to arouse the stubbornly lethargic domestic demand. “Redenomination is not on our agenda and we have no plans to pursue such a move in the near future,” he said.
Rumors of a possible adjustment in the nominal value of the Korean won resurfaced after the BOK chief, in a parliamentary briefing last month, commented that “it is time to start discussions (on redenomination)” and that “research on the subject has already begun.”
Lee explained that his answers were given in formality to questions posed regarding redenomination.
“While redenomination has some expected benefits, it also carries a host of side effects that need to be carefully weighed,” he said. “Given our dire economic conditions, it is more important to focus our attention on boosting the economy and raising productivity,” he added.
The trade-reliant economy saw its outbound shipments fall for the fourth straight month in March to $47.1 billion, down 8.2 percent from a year earlier, amid dwindling semiconductor sales and the sharp economic slowdown of its biggest trading partner China.
By Kim Hyo-jin
[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]