Bank of Korea Seen on Hold as Virus Pain Eases: Decision Guide

The Bank of Korea is widely expected to leave its benchmark rate unchanged on Thursday, after 75 basis points of cuts since the pandemic struck supported sentiment and consumption while risking further overheating in the property market.

The South Korean central bank is expected to hold the seven-day repurchase rate at an all-time low of 0.5%, according to 19 of 21 economists. Two saw another 25 basis-point reduction.

Bank of Korea Seen on Hold as Virus Pain Eases: Decision Guide

The BOK’s rate cuts and supply of “unlimited liquidity” through July, coupled with more than 270 trillion won ($225 billion) in fiscal support, helped stem the slide of economic momentum. While the economy is still expected to contract this year, growing concerns of a property bubble from cheap borrowing costs and abundant liquidity are a significant hurdle to further easing.

“There’s little room left to cut the policy rate further, especially as concerns about rising property prices are growing,” said Lloyd Chan, an economist at Oxford Economics. “Meanwhile, given weak global and domestic conditions, we think it is unlikely that the central bank will raise the policy rate this year.”

While the pandemic ranging in many parts of the world is weighing on South Korea’s exports, domestic demand has started to stabilize on the back of containment at home and policy support. Consumer prices were unchanged in June after previously falling, retail sales increased in May from a year earlier, and consumer and business sentiments have rebounded.

The BOK’s latest forecast in May saw the economy contracting 0.2% this year and inflation slowing to 0.3%, assuming the pandemic peaks in the second quarter. Whether that view still holds will be of focus on Thursday.

Policy Options

If the BOK stands pat as expected, investors will be keen to know what measures it can deploy should the economy worsen. Governor Lee Ju-yeol said in May that its key rate is now close to the effective lower bound, adding that the central bank can consider non-interest rate policy tools.

While Lee didn’t disclose details, most economists in a separate Bloomberg survey expected direct bond purchases to be the most likely option, an extension of what the BOK has already been doing to stabilize markets amid the pandemic. Out of 13 respondents, quantitative easing and yield curve control each had only one vote.

“The BOK may be closer to utilizing more unconventional measures given the worsening pressure on the economy,” said Mitul Kotecha, senior emerging markets strategist at TD Securities.

BOK Lee has repeatedly pledged to keep policy accommodative until the economy recovers, but has recently floated the need to prepare for an eventual “normalization” to prevent financial imbalances. Lee’s comments on financial risks including rising property prices will be closely watched for cues on when the BOK may consider withdrawing stimulus measures, including a potential rate hike.

The Bloomberg survey also saw economists expect that the policy rate wouldn’t be raised until the first half of 2021 at the earliest. Five out of 13 economists saw a hike coming next year, three in 2022, four in 2023 or beyond, while one didn’t expect rates to be raised.

The BOK usually announces its policy decision around 10 a.m. in Seoul, followed by statements assessing the economy and inflation. Lee holds a press conference at around 11:20 a.m. when names of any dissenters are also given.

©2020 Bloomberg L.P.

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