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(LEAD) BOK keeps key rate steady at record low amid protracted pandemic

Economy 10:46 October 14, 2020

(ATTN: UPDATES with more info throughout)
By Kim Soo-yeon

SEOUL, Oct. 14 (Yonhap) -- South Korea's central bank kept its policy rate at a record low of 0.5 percent Wednesday as it is assessing the impact of the protracted coronavirus outbreak on the economy.

As widely expected, the Bank of Korea's monetary policy board stood pat on the benchmark seven-day repo rate, called the base rate, for the third straight occasion.

In August, the BOK froze the key rate as economic uncertainty heightened amid a flare-up in new coronavirus cases. In July, the bank left the rate unchanged as well.

"Although the slump in exports has eased, gains in private consumption have been tepid as the number of newly confirmed cases increased again," the BOK said in a statement.

"Going forward, the economy is likely to recover gradually, led mainly by exports. However, uncertainties surrounding the economic outlook are judged to remain elevated," it added.

The BOK said it will maintain its accommodative policy stance as the recovery of the Korean economy is expected to be slow, while inflationary pressure will remain weak amid the pandemic.

To bolster the pandemic-hit economy, the BOK slashed the base rate to the all-time low of 0.5 percent in May after delivering an emergency rate cut of half a percentage point in March.

Analysts said economic uncertainty has increased despite the latest slowdown in virus cases, while booms in asset markets, including the housing and stock markets, warrant close monitoring.

This file photo, taken June 4, 2020, shows stacks of import-export cargo containers at South Korea's largest seaport in Busan, 450 kilometers southeast of Seoul. (Yonhap)

"The Korean economy showed some signs of an improvement, but amid the protracted pandemic, the momentum, propped up by policy measures, will likely weaken in the fourth quarter," Kim Sun-tae, an economist at KB Kookmin Bank, said.

On Wednesday, South Korea reported 84 more COVID-19 cases, including 53 local infections, raising the total caseload to 24,889, according to the Korea Disease Control and Prevention Agency (KDCA).

In August, the BOK revised down its 2020 growth outlook to a sharper-than-expected contraction of 1.3 percent, citing the impact of a resurgence in virus cases.

In the worst scenario in which the flare-up in COVID-19 cases continues into the winter, the BOK forecast the South Korean economy to retreat 2.2 percent this year.

The central bank said private consumption is expected to recover at a slower-than-expected pace this year due to the virus fallout.

Asia's fourth-largest economy contracted 3.2 percent in the second quarter from three months earlier after shrinking 1.3 percent on-quarter in the January-March period.

But in a sign of economic recovery, exports, which account for about 50 percent of the economy, rebounded for the first time in seven months in September, aided by increased shipments of chips and cars.

The country's overseas shipments took a beating due to the fallout of the COVID-19 pandemic. But the pace of the slump has eased since June as major countries began reopening economic activities following stringent lockdowns.

This photo, taken Oct. 13, 2020, shows a testing center for the new coronavirus in central Seoul. (Yonhap)

South Korea's low inflationary pressure and rising housing prices also appeared to prompt the BOK board to stand pat, experts said.

The consumer prices climbed 1 percent on-year in September on a rise in farm prices, the sharpest gain in six months. The BOK aims to keep inflation at 2 percent over the medium term.

Banks' household lending continued to grow fast in September due mainly to a sustained increase in home-backed loans amid soaring housing prices.

South Korean households' high indebtedness has been one of the main risk factors for its economy, with household credit hitting a record high of 1,637.3 trillion won (US$1.43 trillion) as of end-June.

Analysts said the BOK is expected to maintain the policy rate for the remainder of the year as it faces limited room for further cuts. They forecast the bank to keep the rate freeze mode until next year.

"The BOK will face growing pressure to roll back excessive liquidity in the mid and long term," Shin Dong-su, an analyst at Eugene Investment Co., said.

"But as the local economy will take time to recover to the pre-pandemic level, the bank is expected to keep the current policy stance at least until the first half of 2021," he added.

sooyeon@yna.co.kr
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