[Updated with quotes from BOK governor]

South Korea’s central bank pushed the base rate to a new low of 0.50 percent and signaled the possibility of nonconventional policy tools after warning the country is headed for the first economic contraction in 22 years.

“The base rate is now nearer the effective bottom,” Bank of Korea (BOK) Governor Lee Ju-yeol said in an online press conference after the monetary board on Thursday delivered its second rate cut in two months.

Lee had previously argued that Korea cannot push the rate to zero, like the United States, or into negative territory, like Japan and Europe, all of which own international reserve currencies.

“If the U.S. Federal Reserve pushes the target range to negative, we can have more maneuvering room in our rate policy,” he said, suggesting a further cut would hinge on future Fed actions. The Fed’s short-term interest rates currently stand at a range of 0 percent to 0.25 percent, down by a full-percentage point following two emergency meetings in March.

The BOK monetary board was unanimous in its decision to lower rates by an additional 25 basis points after making an emergency cut of half a percentage point in March. The next rate meeting is scheduled for July.

In the meantime, the BOK is likely to consider other means to defend the economy from a virus-triggered recession. The central bank has previously vowed to provide unlimited liquidity through June via repurchase agreements. Experts now expect the bank to engage in large-scale government bond purchases to back the third extra budget that is estimated to reach 30 trillion won ($24.2 billion).

Debt prices surged on the central bank’s aggressive action, while stock markets were upset by the dismal economic outlook.

On Thursday morning, the three-year government bond yield fell 8.4 basis points to an all-time low of 0.783 percent. The 10-year debt yield plunged 9.6 percent to 1.244 percent. The main Kospi finished 0.13 percent lower at 2028.50 and the junior Kosdaq down 2.19 percent at 708.75.

On the same day, the BOK shaved this year’s growth outlook for Korea to negative 0.2 percent, which would be its first contraction since 1998 in the wake of the Asian financial crisis. The forecast was revised sharply down from a 2.1 percent growth estimate in February.

“The 0.2-percent decline is based on the assumption that Korea avoids mass outbreaks and global coronavirus cases peak in the second quarter,” Lee noted, suggesting the slump could deepen if the virus fallout drags on into the second half.

Korea’s gross domestic product in the first quarter shrank 1.4 percent from the previous three months. Exports have tumbled by more than 20 percent over the past two months.

The government has already unleashed two coronavirus relief packages. The first supplementary budget, worth 11.7 trillion won, was passed in March at the onset of the pandemic. The second extra budget approved in April was bumped up to 12.2 trillion won from the initial 7.6 trillion won to cover emergency handouts for all households.

By Kim Hyo-jin

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]