BOK under growing pressure to cut rate following Fed rate reduction

The Bank of Korea will have no choice but to take all available measures to shield the local economy against further damage from the outbreak of the new coronavirus, including a base rate reduction, especially since the US Fed cut its own rates to nearly zero, analysts here said Monday.

"The Bank of Korea too must now take steps due to the confusion in the local financial market," said Korea Investment & Securities analyst Ahn Jae-kyun.

"Like the central banks of other major countries, the BOK's measures too will likely be rate cuts and liquidity supply," Ahn added.

Such a view was shared by many here after the US Fed slashed its policy rate Sunday (local time) in its second emergency rate cut in less than two weeks.

In its two emergency rate cuts, the Fed slashed its key rate by 150 basis points to a target range of 0 percent and 0.25 percent.

Even prior to the second US rate cut, the BOK said its monetary policy board members were considering holding an emergency meeting to discuss possible measures against the apparently growing impact of the outbreak.

The BOK board had voted to keep the rate steady in its latest meeting held Feb. 27, insisting the fallout from the virus, though already serious, requires industry or business-specific support rather than a monetary policy shift.

South Korea's base rate has been kept at a record low of 1.25 percent since October.

Signs of problems have been ever growing since Seoul confirmed its first infection case on Jan. 20.

Foreign investors sold a net $2.66 billion worth of local stocks in February alone, marking the largest monthly amount in 16 months since October 2018.

The BOK has slashed its growth estimate for the local economy to 2.1 percent from the previous 2.3 percent.

Others, however, anticipate a much gloomier year for Asia's fourth-largest economy.

Global ratings agency S&P has lowered its growth estimate for South Korea to 1.1 percent from 2.1 percent, with Moody's Investors Service slashing its projection to 1.4 percent.

Seoul has already taken many aggressive measures to stem the virus and keep the economy from shrinking, including two support packages worth 20 trillion won ($16.5 billion) in total.

It is also seeking an extra budget of 11.7 trillion won, which, if approved by parliament, would mark the largest of its kind to be formed against an outbreak and also the first to be formed in the first quarter since 2009.

Analysts said a rate cut may be the only policy measure missing or left.

"We expect the BOK to cut the rate as part of a policy mix that includes the extra budget. It had been hard to imagine the rate dipping to 1 percent, but the president's call for extraordinary steps has expanded the possibility of a rate cut through an emergency monetary policy board meeting," said Kim Sung-hoon, an analyst at KB Securities.

"The Fed lowering its rate to nearly 0 percent may also boost market expectations for a 50 basis point cut by the BOK," Kim added.

South Korea has reported more than 8,100 confirmed cases of COVID-19 with 75 deaths as of Sunday. (Yonhap)