Bank of Korea’s Lee Puts Recovery Before Property Price Concerns
Bank of Korea kept interest rate unchanged and said it expects the economy to contract this year by more than it forecast in May.
(Bloomberg) -- Bank of Korea Governor Lee Ju-yeol said helping the virus-hit economy took precedence over property market concerns after keeping interest rates at a record low.
The central bank now expects the economy to shrink more than it expected just two months ago given the resurgence of the pandemic, Lee said Thursday, following a unanimous vote by the board to keep its seven-day repurchase rate at 0.5%.
“We decided to hold the rate with the view that the current stance should be continued, considering the outlook, growth and inflation trends, rather than the situation in the housing market,” Lee said. Keeping monetary policy accommodative was unavoidable while the BOK responded to the pandemic, he added.
With the comments Lee pushed back against the view that rising home prices could make board members hesitant to ease further, or even force them to consider raising rates in the near term to prevent fueling a property bubble.
The remarks come amid a public backlash against soaring prices in Seoul and the perceived enrichment of multiple home owners including politicians. In a sign that the discontent is weighing on public confidence in policymakers, President Moon Jae-in’s approval rating fell to 44% this week from 49%, local pollster Realmeter said Thursday.
While the BOK said in a statement that household debt has risen “materially,” Lee said that aiding an economic recovery was still front and center for the board, given the gloomier outlook.
“We had assumed the spread of the coronavirus would subside from June, but it has been accelerating,” Lee said. “Consumption will improve in the second half but will be dependent on the virus situation, and exports recovery will be delayed.”
Lee’s comments were more dovish than markets had expected, according to Koo Hyeyoung, fixed-income analyst at Mirae Asset Daewoo Co.
“The BOK has drawn a line” against views that tougher government regulations on real estate would prompt the bank to fall in line and tighten monetary policy by raising rates, Koo said.
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. Lee said the BOK can step up bond buying in case of market volatility. 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. Private sector analysts are projecting a 0.6% contraction.
What Bloomberg’s Economist Says
“With the policy rate close to the effective lower bound, we think more cuts to the benchmark rate are unlikely in this easing cycle. But as the economy is still weak -- and the central bank is expecting growth to come in below its earlier projections -- unconventional policy tools remain on the table.”
--Justin Jimenez, economist
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