MNI PREVIEW: BOK Rate Cut Back In Play On Virus Outbreak

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Korea may mull a further rate cut as the impact

of the coronavirus outbreak weighs on the Korean economy when it meets on Feb.

27, despite concerns over imbalances caused by low interest rates.

     Korean President Moon Jae-in has called for "all possible measures" to be

taken to support the economy, while central banks other in emerging Asian

economies, including Thailand and the Philippines, have already pre-emptively

cut rates, increasing pressure on BOK Governor Lee Ju-yeol to lower the key

rate.

     The BOK cut its base rate to 1.25% in October, matching the all-time low

seen between September 2016 to October 2017, but is reluctant to push the

benchmark rate lower, concerned by household debts at record highs.  However,

the current uncertainty and President Moon's appeal will give the central bank

pause for thought when it meets on Feb. 27.

     Although the full impact of the virus has yet to be seen, early indications

are that exports, particularly to China, remain weak. They fell for a 14th

straight month in January, down 6.1% y/y, remaining weak even before the full

impact of the virus outbreak had been seen.

     Hidehiko Mukoyama, a senior economist and South Korea watcher at the Japan

Research Institute's Economics Department, said that a rate cut to ease the

heightened uncertainty and anxiety can't be ruled out, putting the chance of a

cut at about 30%.

     --STALLED RECOVERY

     There had been nascent signs of a recovery in IT-related exports, a boost

to Korean exporters, but the damage to their supply chains from virus-driven

disruption has become a barrier.

     "Korean exports had shown a sign of recovering. The coronavirus outbreak is

bad timing (for Korean exports to gain momentum)," JRI's Mukoyama said.

     Korean auto makers have also suffered from the disrupted supply chains in

China, with Hyundai Motor even suspending production at one point as the flow of

parts dried up.

     Hyundai, which has built a large manufacturing capacity in China over

recent years, has resumed production, but it is still uncertain to what degree

the process has recovered.

     The fall in Chinese visitor numbers is weighing on domestic demand across

Korea as well, as tourism revenues decline sharply.

     South Korea's economy is heavily China-reliant, accounting for around 25%

of the total exports and 21% of imports.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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