The supplementary budget of 12 trillion won is expected to have the effect of raising the economic growth rate by 0.1 percentage point (p).
Bank of Korea Governor Lee Chang-yong said this during a press briefing held at the Bank of Korea headquarters in Jung-gu, Seoul, immediately after the Monetary Policy Committee meeting, where the base rate was frozen at 2.75% on the 17th.
Governor Lee previously projected that a supplementary budget of 15 trillion to 20 trillion won would be appropriate and that in such a case, the economic growth rate would increase by 0.2 percentage points (from 1.5% to 1.7%) this year. However, since the Ministry of Economy and Finance has structured the supplementary budget at 12 trillion won, if it passes the National Assembly as it is, the increase in the economic growth rate is expected to be smaller than initially anticipated.
Governor Lee emphasized that the research result published in the quarterly academic journal 'Economic Analysis' by the internal economic research institute, which indicated that government expenditure increases domestic gross product (GDP) by 1.45 won for every 1 won spent, is unrelated to the Bank of Korea's views. The paper was authored by Professor Heo Jun-young of Sogang University and doctoral student Kim Se-hun.
The governor stated, '1.45 won is considered too high' and that 'we believe 0.4 to 0.5 won is correct.' The anticipated effect of a 0.1 percentage point increase in the economic growth rate due to the supplementary budget aligns with this context.
He refrained from commenting on the appropriateness and proper size of a second supplementary budget. The governor noted that 'the most effective tool to convey the message that economic policy is conducted separately from politics (such as the emergency state during the 12·3 crisis) was the supplementary budget,' adding that 'it was exceptionally mentioned by the central bank governor in February due to concerns about potential impacts on external credibility.'
He continued, 'Normally, when the government announces the supplementary budget, the Bank of Korea provides responses in terms of monetary policy,' and asked not to assume that during the Bank of Korea's economic outlook announcement in May, there will be discussions about 'what scale the supplementary budget should be.'
He projected that this year's annual growth rate would be lower than the February estimate of 1.5%. The governor said, 'Political uncertainty has prolonged beyond expectations, delaying the recovery of economic sentiment,' and pointed out that 'extraordinary factors such as large wildfires and the halt of some construction sites have contributed to ongoing domestic sluggishness.' He also explained that exports have seen a 'generally weak momentum due to reduced growth in early April amid deteriorating trade conditions.'
There is a significant possibility that the growth rate will fall short of expectations starting from the first quarter. Last November, the Bank of Korea projected a growth rate of 0.5% for the first quarter but lowered that figure to 0.2% two months ago in February. The governor indicated that 'the first quarter growth rate could also be significantly adjusted downward,' explaining that 'a combination of base effects and tariffs will lead to a considerable decline in the growth rate.' The Bank of Korea is also assessing the possibility of negative growth.
Regarding specific annual growth rate estimates, the governor stated, 'There is great uncertainty about how the final tariffs for each country will be decided as negotiations progress and when and what scale the supplementary budget will be structured,' adding, 'I will present specific figures after closely monitoring the developments of risk factors in May.'
The Monetary Policy Committee's decision to freeze interest rates also aligns with this context. The governor mentioned, 'The intensity of the U.S. tariff policy and the responses from major countries have been changing rapidly in the short term, making it currently difficult to even establish a basic scenario for projections,' and explained that 'it was deemed appropriate to maintain the base rate at the current level while observing how the uncertainties in domestic and foreign policy conditions evolve.'
Additionally, the recent fluctuations of the won against the U.S. dollar, which have ranged between 1,420 won and 1,480 won over the past week, were also considered. In particular, the burden on foreign exchange supply remains due to net selling of domestic stocks by foreign investors and resident overseas securities investments.
Market opinions suggest a high possibility that the Bank of Korea will lower interest rates at the next Monetary Policy Committee meeting scheduled for May. While only one of the six committee members, Commissioner Shin Seong-hwan, assessed that a significant rate cut is necessary with inflation in mind during the recent meeting, there is consensus among all on the need for rate reductions going forward.
The governor stated, 'All six Monetary Policy Committee members, except for myself, said we must keep open the possibility that the base rate could go below 2.75% within three months,' adding, 'this is mainly because there is a high possibility of lowering the forecast when we project the economy in May.'
He further noted, 'The day before, I mentioned in the National Assembly that the current economy is in a rate-cutting cycle, but how high the final rate will be and the pace of adjustments depend on other conditions,' adding that 'more discussions can happen once the economic forecast figures for May are confirmed.'
He also clarified that even if interest rates are lowered in May, it is unrelated to the early presidential election on June 3. The governor stated, 'The Bank of Korea tries to make decisions on monetary policy based solely on economic data without considering politics,' and emphasized that 'it is free from politics as an unelected power and believes it must fulfill its inherent duties.'
The governor said, 'We started lowering interest rates earlier than other countries since last October and will continue to do so,' adding that 'I do not agree with the assessment that our monetary policy is conservative.' He remarked, 'We are acting proactively according to the circumstances,' and emphasized, 'It is natural for Korea to be affected if the U.S. delay its rate cuts, but we do not make mechanical adjustments to narrow the interest rate gap.'