(Bloomberg) — The Bank of Korea held its key interest rate amid mounting pressure on policy makers to take more action to ensure the resurgence of the coronavirus doesn’t derail the economy’s recovery.
The BOK maintained its seven-day repurchase rate at 0.5% on Thursday, a decision predicted by all 22 analysts surveyed by Bloomberg. The central bank also said it now expects the economy to shrink 1.3% this year, far worse than the 0.2% contraction it forecast in May. It sees inflation picking up slightly to 0.4%, from 0.3% earlier.
The hold underscores the balancing act facing the BOK, as it remains wary of adding stimulus that could further fuel property gains while the economic toll from the latest virus wave becomes evident. Governor Lee Ju-yeol said earlier this week the ongoing outbreak is the biggest risk to growth.
“The cut in the growth forecast speaks to falling demand,” said An Young-jin, an economist at SK Securities. “The elevation in the inflation projection, however, reflects gradual price increases among supply-side factors such as commodities and oil after some extreme slides earlier this year.”
South Korea’s 10-year bond yield declined 3 basis points to 1.38% as of 9:58 a.m. in Seoul after the central bank slashed its economic forecasts. The won gained 0.1% to 1,185.65 per dollar amid broad risk-on sentiment.
So far this year, the BOK has cut its benchmark rate by 75 basis points to blunt the impact of the pandemic, in addition to supplying liquidity and purchasing bonds to stabilize markets. The government has also implemented three extra budgets this year, the biggest stimulus of its kind on record.
Still, the BOK lowering its projection by a significant margin shows the bank sees stimulus falling short of offsetting the fallout from the global pandemic. The virus flareup at home and in its key trade partners, combined with floods that pounded parts of South Korea, have contributed to economists lowering their growth forecasts.
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How the BOK will respond should the economy worsen is a key focus for central bank watchers. The central bank sees the current rate as close to the effective lower bound, suggesting the bar for further rate cuts is high.
The bank has also been under fire from some lawmakers for providing liquidity that has aggravated a property bubble in parts of the country. Any further stimulus by the BOK would have to be carefully implemented as not to run counter to efforts by the government to curb property prices, including a series of regulations on home purchases and ownership.
Governor Lee has repeatedly said the bank was ready to turn to “unconventional” steps to stimulate the economy if necessary, without providing specifics.
While most analysts don’t expect the South Korean bank to adopt quantitative easing or yield curve control like some of its peers, it may step up bond purchases as prospects rise for more government debt issuances to fund emergency spending.
(Updates with market reaction, economist’s comment.)
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