Bank of Korea sees growth below earlier forecast, holds rates

SEOUL (BLOOMBERG) – The Bank of Korea kept its key interest rate unchanged and said it expects the economy to contract this year by more than it forecast in May.

The BOK held its seven-day repurchase rate at 0.5 per cent on Thursday (July 16), a move forecast by 19 of 21 analysts surveyed by Bloomberg. Two expected a 25 basis point cut.

The board will maintain its accommodative policy stance as the economy will likely shrink by more than the 0.2 per cent it forecast in May, and the Covid-19 pandemic will lessen inflationary pressures, the central bank said in a statement after the decision.

While consumption has rebounded as virus-related restrictions are relaxed, the pace of recovery in exports and consumption will be slower than previously forecast, the BOK said.

The BOK’s more downbeat assessment of the economy comes despite an improvement in the jobless rate and recent upticks in confidence among businesses and consumers as authorities manage to keep the domestic spread of the virus under control.

Rising home prices, a key concern of the government, may have also made the board hesitant to take further action that would make borrowing costs cheaper and might fuel a property bubble.

The central bank noted in the statement that the increase in household loans has expanded “materially,” while housing prices have “generally accelerated” in all parts of the country.

“The freeze decision is the BOK’s way of playing safe,” said Park Jeong-woo, an economist at Korea Investment & Securities, adding that the decision comes with the economic recovery still slow and fears over a second wave of infections.

South Korea’s financial markets were largely stable after the statement. The country’s 10-year bond yield was steady at 1.42 per cent as of 10:37 a.m. in Seoul, while the won weakened 0.2 per cent against the dollar to 1,202.90.

The BOK has taken a raft of measures to protect the economy amid the pandemic, cutting its key rate by 75 basis points, supplying liquidity and purchasing bonds to stabilize financial markets. The government has also implemented record stimulus in three extra budgets so far this year.

Still, analysts are cutting their economic forecasts for South Korea as trouble continues for exports, the country’s biggest growth engine.

The central bank will update its growth outlook in August. The BOK’s 0.2 per cent contraction forecast in May had assumed the pandemic peaks in the second quarter. Private sector analysts project -0.6 per cent.

MORE STEPS

Investors will also be looking for any hints of measures Governor Lee Ju-yeol might consider if risks to markets and the economy rise. The governor has been more vocal in recent months about turning to unconventional steps to stimulate the economy, without providing specifics. Mr Lee is scheduled to speak to the members of the press at 11:20am.

“While the BOK may not be able to tweak the benchmark rate further, it is likely to deploy other measures instead.,” said Kim Myungsil, fixed-income analyst at Shinhan Investment.

While most analysts don’t expect the BOK to adopt quantitative easing or yield curve control like some of its peers, it could further step up bond purchases as the government issues more debt to fund emergency spending.

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