Bank of Korea cuts policy rate to new record low

South Korea’s central bank cut its policy rate to the record low of 0.5% today (May 28), while forecasting consumer inflation to drop below zero for the year of 2020.

The 25 basis point cut came after the Bank of Korea (BoK) slashed rates from 1.25% to 0.75% in an emergency meeting in March. It was the central bank’s first emergency rate cut since the global financial crisis in 2008.

“The board expects that domestic economic growth will remain sluggish for some time due to the impact of the Covid-19 pandemic,” the BoK said in a statement. The central bank is projecting a 0.2% contraction this year, a sharp decline from the forecast of 2.1% in February.

“Economic growth in Korea has slowed considerably. Consumption has remained sluggish and exports have fallen significantly,” the BoK said. “Labour market conditions have worsened with a sharp decline in the number of persons employed, especially in the service sector.”

The central bank said it will continue to conduct monetary policy in order to support the economy, indicating further easing moves may be necessary if growth outlook worsens.

“As economic growth is expected to be sluggish and inflationary pressures on the demand side are forecast to remain weak due to the Covid-19 pandemic, the board will maintain its accommodative monetary policy stance,” the BoK said.

Governor Lee Ju-yeol said the central bank will consider all forms of additional measures to support the economy if needed.

“The latest growth outlook is based on an assumption that the pandemic will reach its peak in the second quarter globally, and that there will not be any major second wave of the virus in the country,” Lee said during a press conference in Seoul.

South Korea has reimposed quarantine measures to close all public parks, museums and outdoor leisure facilities in its capital city, Seoul, until mid-June, after seeing its biggest spike in coronavirus cases since April. The Korea Centers for Disease Control and Prevention reported 40 new cases on Tuesday (May 26), bringing the country’s total number to 11,265.

The exports-reliant economy shrank 1.4% in the first quarter of this year, the most severe contraction since 2008, as the pandemic weighed on consumer demand and exports.