Rate cut not panacea; other policies should follow
Bowing to the reality the infectious and persistent COVID-19 virus has wrought, the central bank forecast that South Korea's economy will contract 0.2 percent this year. This figure is worse than the 0.2 percent growth the Korea Development Institute recently estimated, and one that lurks closer to the 1.2 percent contraction the International Monetary Fund forecast.
The Bank of Korea (BOK) also cut its key interest rate by 0.25 percentage points to 0.5 percent, the lowest ever in the current system which was put in place in 1999.
The second rate cut of the year was not as much of a surprise as the March one, more a matter of timing. The BOK is scurrying after other central banks ― to the best of its capacity ― to limit the fallout from COVID-19. The 0.2 percent, if materialized,would be the worst economic performance since the country was hit by the Asian financial crisis in 1998. And the unprecedented interest rate only confirms what many people had been bracing for ― a prolonged trip ahead through what may be a long dark economic tunnel.
Exports in April dropped 24.3 percent, and the figures for May are not expected to be much different. In addition, nearly 500,000 jobs were slashed in April. Korea's export dependency demonstrates its vulnerability to the strained relations between its top two export destinations ― the United States and China.
Government officials at all levels have expressed a gloomy outlook for Korea Inc. President Moon Jae-in has repeatedly stressed that this is a “wartime economic situation,” and has been pushing forward fiscal expansion. Thus the central bank's moves are actually in lockstep with this.
The task now is to make sure the rate cut will be effective, as there is less room for another. BOK Governor Lee Ju-yeol said just as much when he said the 0.5 percent rate was the effective lower boundary, a point where the “cons” may rule over the “pros” for another cut.
Low interest rates, while making borrowing cheaper for businesses and households, can also enable capital outflow and asset bubbles ― namely the heated housing market. Korea's massive household debt is another constant concern. Other policies must be brought forth, such as more deregulation, to get the economy humming.
Even the 0.2 percent contraction lies on the assumption that a second pandemic wave doesn't hit the country and that the number of global infections peaks in the second quarter. Vigilance on both the economy and the virus is the only strategy for survival.