hankyoreh

Lee Ju-yeol, governor of the Bank of Korea presides over an ad hoc Monetary Policy Committee meeting in Seoul on Mar. 16. (provided by the Bank of Korea)

After the Federal Reserve -- the US’ central bank -- moved on Mar. 16 to lower the benchmark interest rate to zero, the Bank of Korea (BOK) reduced its own benchmark interest rate by 0.5 percentage points from 1.25% to 0.75% at an ad hoc Monetary Policy Committee (MPC) meeting that same afternoon. This marks the first time in history the South Korean interest rate has stood below 1%.

Previously reluctant to lower the interest rate due to concerns about housing prices and household debt, the BOK decided to hold its ad hoc MPC meeting ahead of schedule and lower the interest rate based on its conclusion that the top priority at the moment is to stabilize the financial market and ease anxieties among economic actors. Only twice in the past has the BOK ever held an ad hoc MPC meeting to lower the interest rate: once in September 2001, shortly after the 9/11 attacks, and again in October 2008, during the global financial crisis. The bank also presented plans for increased liquidity, such as lowering the bank’s intermediated lending support loan interest rate from the 0.50-0.75% range to 0.25%. They’ve also included bank banks among the securities subject to open market operation.

The Federal Reserve lowered its benchmark interest rate by a percentage point, taking it from the 1.00-1.25% range to the 0.00-0.25% range. It had previously lowered the rate by 0.5 percentage points on Mar. 3 -- meaning a reduction of 1.5 percentage points in the space of two weeks. It’s an unconventional and aggressive decision. The Fed has also implemented US$700 billion worth of quantitative easing measures, purchasing US$500 billion in government bonds and US$200 billion in mortgage-backed securities (MBS). An interest rate of zero and quantitative easing were also the two approaches deployed by the Fed during the global financial crisis of 2008. That’s how seriously it is taking the economic impact of the global coronavirus pandemic. In a statement, it noted that the outbreak “has harmed communities and disrupted economic activity in many countries, including the United States” and that “[g]lobal financial conditions have also been significantly affected.”

The central banks of Canada, the UK, and Australia all followed suit after the Fed’s previously Mar. 3 interest rate cut, and Japan also looks poised to soon join the ranks in slashing its rate.

The South Korean government is likewise concerned about the possibility of the coronavirus situation developing into a complex crisis that simultaneously impacts the real economy and financial sector. At a macroeconomic finance meeting on Mar. 16, First Vice Minister of Economy and Finance Kim Yong-beom said, “We cannot rule out the possibility of the coronavirus situation having a complex shock effect on the real economy and financial sector as it persists over time.” Discussing a potential recovery situation if the virus abates, he warned, “A so-called ‘V-shaped’ recovery is expected to be unlikely, and there are even fears of a ‘U-shaped’ one or even an ‘L-shaped’ one.” His message is that we need to prepare for a long battle. On Mar. 13, President Moon Jae-in characterized the current conditions as an “emergency economic situation” and ordered the development of unprecedented response measures.

As a first step, the supplementary budget plan urgently needs to be passed on Mar. 17, which marks the last day of the February extraordinary session. Yet as of Mar. 16, the ruling and opposition parties had been unable to reach an agreement on the budget’s scale. The United Future Party (UFP), which has its eyes on the Apr. 15 general election, decried what it described as “populism” and the “scattering of taxpayer money.” It is not responsible for a political party to be weighing the potential election benefits of matters like this and turning it into a wedge issue when popular livelihoods are careening toward crisis.

The situation right now is effectively a war. It is not a time for saving ammunition. Even if we have to accept some temporary worsening of soundness in the fiscal, financial, and foreign exchange sectors, we need to respond with every means at our disposal.

Please direct comments or questions to [english@hani.co.kr]