Bank of Korea Seen Dragging Feet on Policy Amid Virus Crisis

(Bloomberg) --

The Bank of Korea is facing criticism from some central bank watchers that it is dragging its feet amid the world's second-largest coronavirus outbreak as its global peers including the Federal Reserve step up action.

The South Korean central bank held its key interest rate unchanged last week, while a majority of analysts had forecast a cut to a record 1%. In a Wednesday meeting led by Governor Lee Ju-yeol just hours after the Fed's surprise rate cut, it fell short of pledging immediate action as expected by many in the market.

Now speculation is rising that the bank will convene an emergency board meeting this month to cut its interest rate, as it did in the depths of the global financial crisis. The BOK's next scheduled rate decision is April, by which time some worry the economic damage may have become more difficult to contain.

“The Bank of Korea missed an opportunity to support the Korean economy,” said Sung Won Sohn, an economics professor at Loyola Marymount University. “Unlike an additional budget which requires parliamentary approval, monetary policy can be implemented very quickly. Korea needs urgent action now.”

The BOK's decision to keep rates unchanged for now stands in contrast with regional central banks from Australia to Malaysia that have lowered rates, and the Fed's 50 basis point cut in an unscheduled meeting.

In the Wednesday meeting convened by Governor Lee, the bank reiterated there's a limit to what monetary policy can do to counter the virus fallout, but acknowledged that there have been changes in the policy environment since its last meeting, including the Fed's cut.

“While there is no regular rate decision meeting in March, we now expect the BOK will cut 25 bps in March possibly through an inter-meeting action,” Park Seok-gil, an economist at JPMorgan, wrote in a note to clients.

Party Pressure

Calls for a monetary policy response are also coming from South Korea's ruling party. The policy chief of the Democratic Party on Thursday mentioned the Fed cut and said he “expects monetary authorities to make a proper judgment,” according to a release of his remarks.

South Korea is suffering the worst outbreak of the disease outside China, with the epidemic spreading to 5,600 people in a matter of weeks. Confidence among South Korean consumers and manufacturers has plunged just as fast. Supply chains to factories have been hit hard and throughout the country streets and shops that used to be bustling are empty.

President Moon Jae-in has called for “extraordinary” efforts to protect the economy and the government this week drew up a 11.7 trillion won ($9.8 billion) extra budget proposal to fight the epidemic.

The BOK's reluctance to act fast reflects its concern about financial risks. Another rate cut could inflame already high household debt and fuel home prices, which Moon himself pledged early this year to fight “endlessly.” The bank may also be worried about depleting its ammunition, as the BOK has previously said its interest rate needs to be higher than that of key-currency nations.

“I think the BOK is too frightened of walking into uncharted territory,” said Park Jeong-woo, an economist at Korea Investment & Securities.

To contact the reporter on this story: Sam Kim in Seoul at skim609@bloomberg.net

To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Jiyeun Lee, Jason Clenfield

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