Bank of Korea Warns Economic Growth Is Poised to Drop Below 3%

  • Lee's comments come as BOK is set to revise outlook in April
  • The ruling party has suggested BOK could purchase more bonds

Lee Ju Yeol.

Photographer: SeongJoon Cho/Bloomberg

Bank of Korea Governor Lee Ju Yeol warned Wednesday that economic growth for 2016 is poised to fall below 3 percent and said the impact of further interest-rate cuts may be limited.

The comments come amid a change in the BOK’s board and speculation of additional rate cuts given the ruling party’s request for the bank to follow the lead of Japan and Europe’s central banks to purchase more bonds. Korea’s government bond yields fell to the lowest level in more than a month on Wednesday.

“First-quarter growth was weaker than expected, but recently there are some positive signs like the rebound in global oil and improvement in sentiment,” Lee said at a press briefing. “While volatility in financial markets has decreased recently and capital outflow has stabilized, factors remain that limit the impact of rates, like sluggish external demand and financial stability issues like household debt.”

The BOK, which in January forecast 3 percent growth and 1.4 percent inflation for 2016, will revise its economic outlook on April 19.  

The central bank this week announced four nominees to replace board members whose terms end April 20. As the nominees are either from the government or have worked for state-funded research organizations, economists including those at Nomura Holdings and Standard Chartered Bank have said the change boosts their rate-cut calls.

“Investors seem to speculate new board members’ stance based on their past speeches and the institutions that recommended them, but based on my experience, members’ policy decisions change when economic situations change,” Lee said. “Korea’s monetary policy has to be data-dependent when domestic and external situations are uncertain.”

Aggressive Policies

The ruling Saenuri party said on Tuesday in its economic policy platform ahead of the April parliamentary election that the BOK should adopt aggressive policies including more debt purchases to help funds flow directly to necessary areas.

Saenuri suggested that the BOK directly purchase debt issued by the state-run Korea Development Bank to provide it with more funds to help restructure companies, and also to purchase mortgage-backed securities to ease the household debt burden. 

Currently, the BOK can purchase government debt or government-guaranteed notes for the purpose of controlling liquidity. KDB bonds and mortgage-backed securities don’t fit the criteria. Saenuri’s suggestion would require a change in relevant laws and also the approval of BOK’s monetary policy board.

Lee said he couldn’t comment directly on a party’s election pledge, though he said the central bank is doing its best to support the economy and aid corporate restructuring.

The BOK next reviews the benchmark interest rate on April 19 after having kept it at 1.5 percent since June 2015. The April gathering will be the last of the current board.

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