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BOK likely to cut interest rate amid virus pandemic

(Yonhap)
(Yonhap)

Amid the prolonged economic fallout from the COVID-19 pandemic, the Bank of Korea may slash its policy rate at the next monetary policy board meeting, according to local brokerages Sunday.

The yield of three-year treasury bonds on Friday closed at 0.87 percent, down 0.13 percentage point from end-April, while that of 10-year bonds fell to 1.38 percent, down 0.14 percentage point during the same period.

Bond prices, which move inversely to yields, have been on a sharp decline since market experts forecast that a sluggish economic environment would continue due to the novel coronavirus situation, which has lasted longer than expected.

Reflecting the gloomy outlook, the yield on three-year government bonds hit its lowest point at 0.86 percent on Wednesday. Foreigners’ buying binge of local bonds further raised the possibility of a key rate cut. They held 140.5 trillion won ($113.9 billion) worth of listed government bonds as of end-April.

Some local analysts said the BOK will cut the base rate by a quarter percentage point to an unprecedented 0.5 percent at the next rate-setting meeting, which is slated for May 28.

The BOK left its benchmark interest rate unchanged in April, but the central bank’s Gov. Lee Ju-yeol hinted at a possible rate reduction down the road.

“At the April meeting, the central bank expected a slowdown in the spread of COVID-19 from the second quarter this year and resuming economic activities from the third quarter. However, the possibility of the prolonged global market’s uncertainty and low price environment have recently increased,” said Koo Hye-young, a fixed income analyst at Mirae Asset Daewoo.

Kang Seung-won, an analyst at NH Investment & Securities, agreed that the BOK has no choice but to make further aggressive rate cuts this month, considering the “worse economic conditions.”

Some observers, on the other hand, remained skeptical over imminent changes and suggested that the rate cut will take place later in the third quarter along with additional policy actions such as massive local bond purchases.

“An active treasury bond purchase is necessary, not for quantitative easing purposes, but to stabilize the local bond market,” said Lee Mi-sun, a fixed income analyst at Hana Financial Investment. “Other nations’ decision on opening bond-buying floodgates will also affect the BOK’s action.”

By Jie Ye-eun (yeeun@heraldcorp.com)
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