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(2nd LD) BOK keeps key rate steady at record low amid protracted pandemic

All News 12:25 October 14, 2020

(ATTN: RECASTS throughout with more details)
By Kim Soo-yeon

SEOUL, Oct. 14 (Yonhap) -- South Korea's central bank kept its key interest rate steady at a record low Wednesday as it is assessing the impact of the protracted coronavirus outbreak on the economy while monitoring rising housing prices.

The Bank of Korea (BOK) said it will keep its accommodative policy stance as uncertainty about the growth path remains high amid the COVID-19 pandemic, signaling that there will be no change in the policy rate for the time being.

In a unanimous decision, the BOK's monetary policy board froze the benchmark seven-day repo rate, called the base rate, at 0.5 percent for the third straight time.

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.

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

The BOK said Asia's fourth-largest economy is likely to recover gradually, helped by improving exports, but uncertainties for the economic outlook seem to be "elevated."

"Uncertainty for the growth path remains higher than at any time in light of a resurgence in virus cases and deepening (trade) tensions between the United States and China," BOK Gov. Lee Ju-yeol said at an online press briefing.

"The BOK plans to maintain the accommodative monetary policy stance until the fallout of the COVID-19 pandemic weakens, and the local economy will recover subsequently," he added.

The rate freeze came as economic uncertainty has heightened 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.


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