The Bank of Korea lowered its 2020 GDP growth forecast to 2.1 percent from its earlier prediction of 2.3 percent, as rising fears of the coronavirus epidemic heighten economic uncertainty in Korea.
The adjustment came amid the virus’ emerging effects on the economy, with domestic consumption and export activities slowing, according to the central bank. The BOK also raised the likelihood of the economy contracting in the first quarter due to the “coronavirus shock.”
“The economy will suffer the strongest impact from COVID-19 in the first quarter, and the epidemic will have a much larger influence than any other viral outbreak in the past,” BOK Governor Lee Ju-yeol said in a press conference.
The economic contagion from the virus has become increasingly evident over the past two weeks, as Korea reported a surge in the number of confirmed infections, the central bank said. “The services industries, particularly tourism, food and retailing have been hit hardest by shrinking consumption caused by fear of the virus,” Lee said.
The downward readjustment of the GDP outlook came under the assumption that the spread of the epidemic will reach a peak in March before slowly dying down, according to the BOK chief. The central bank also kept its key interest rate at 1.25 percent during the second rate-setting meeting of the year.
Earlier, experts had remained poles apart over the possibility of a further rate cut to a record low 1 percent. Those in favor of the move argued that the sudden explosion of the virus has drastically weakened consumer confidence in recent weeks, and so the central bank should remain accommodative in its monetary policy.
But the BOK kept the rate unchanged from the previous level, reaffirming its decision to maintain a wait-and-see approach over the economic impact of COVID-19.
“The possible duration of the virus still remains to be seen, so members of the Monetary Policy Board decided not to be hasty in cutting the rate now,” Lee said.
But two of the seven-member board ― Cho Dong-chul and Shin In-seok ― voted for a rate cut to 1 percent, underlining their opinion that there was a need for monetary easing. The dovish members also urged the central bank to cut the rate in this year’s first meeting in January.
The central bank governor, however, explained that the board decided to maintain the status quo because potential rate cuts may add more confusion to the existing volatility on the financial market caused by the epidemic.
Microeconomic policies would be more effective than any adjustment in the rate, as most of the recent economic contractions have been due to market uneasiness stemming from the virus, he said.
The BOK also reflected on the government’s real estate policy to stop speculation in the property market and stabilize soaring apartment prices in Seoul and surrounding areas.
“We also did not slash the rate to be in line with the government’s real estate policy drive,” he said. Local economists argue that the government remains too optimistic in its outlook for the economy.
“It appears that it will be very tough for GDP growth to top the 2-percent mark in 2020, as the ongoing economic downturn will get even worse throughout the year along with the spread of the coronavirus,” Yonsei University professor Sung Tae-yoon said.
He said it would be risky for the central bank to cut the base rate amid growing instability in the local real estate and foreign exchange markets in the aftermath of the coronavirus outbreak.
“But when you look only at the current economic slump, it would not be surprising for the BOK to cut the rate further,” he said.
Cutting the rate can be meaningful in that it helps alleviate market uncertainty by sending a signal that the government is willing to play a proactive part in the issue, said Noh San-ha, another economist at the Korea Capital Market Institute.
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“A potential interest rate cut, in itself, cannot become a solution to the fight against the virus-driven economic slump, but the move will deliver a positive signal to relieve market confusion,” he said.
(Source: Korea Times)