BOK says Fed rate cut gives it more policy room, may buy bonds to curb volatility

By Cynthia Kim

SEOUL (Reuters) - South Korea's central bank said on Wednesday that the U.S. Federal Reserve's emergency interest rate cut gives it more policy room to manoeuvre by reducing the risks of capital outflows from Asia's fourth-largest economy.

In a statement after an urgently scheduled meeting in Seoul, the Bank of Korea (BOK) said outflow risks had eased as the Fed's overnight 50 basis-point cut to a range of 1.00% to 1.25% put policy rates of the two countries at a similar level.

The BOK, however, stressed that the bank needs to consider factors other than capital movements when conducting policy, and said taking its rate down to an "effective lower bound" from the current 1.25% <KROCRT=ECI> deserves comprehensive study.

The BOK is under pressure to ramp up stimulus and cut rates further as central banks around the world step up monetary easing to mitigate the economic impact of the coronavirus epidemic.

Yields on South Korean three- and five-year treasury bonds dropped to record lows on Wednesday as traders priced in lower borrowing costs in coming days.

The BOK surprised markets last week by keeping its base rate unchanged, even as it downgraded the growth outlook amid a rising number of coronavirus infections in the country. It now has the most cases outside of China, where the outbreak originated.

The central bank said later in the day that it could not confirm if it would hold an inter-meeting rate review this month. The next scheduled meeting is on April 9.

It also said it would consider outright purchases of treasury bonds if markets grow even more volatile.

In the Wednesday meeting, Governor Lee Ju-yeol stressed the limits of monetary policy and called for a more targeted support measures from the government.

Earlier in the day, the government announced a stimulus package of 11.7 trillion won ($9.8 billion) to channel more money to the health system and struggling smaller businesses.

Analysts at ANZ said the package could boost 2020 economic growth by 0.2 percentage points to 1.9%, and say a BOK rate cut by April to complement the fiscal push is more likely than not.

(Reporting by Cynthia Kim; Editing by Kim Coghill)