Bank of Korea Set to Extend Hold as Virus Eases: Decision Guide

(Bloomberg) — The Bank of Korea is likely to keep its benchmark interest rate on hold on Wednesday, amid signs of economic improvement and a tapering of local coronavirus cases. All 21 analysts surveyed by Bloomberg expect the central bank to maintain its seven-day repurchase rate at 0.5% for the […]

(Bloomberg) — The Bank of Korea is likely to keep its benchmark interest rate on hold on Wednesday, amid signs of economic improvement and a tapering of local coronavirus cases.

All 21 analysts surveyed by Bloomberg expect the central bank to maintain its seven-day repurchase rate at 0.5% for the third consecutive meeting, having cut by 75 basis points earlier this year.

South Korea’s latest exports and inflation data surprised to the upside, likely giving reasons for the BOK to stand down on further easing for now. The government relaxed social distancing rules from this week as daily virus cases fell to around 100, allowing more economic activity to resume.



graphical user interface: Korea's exports and inflation improve ahead of BOK decision


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Korea’s exports and inflation improve ahead of BOK decision

“With signs that the virus situation is coming under control, the pressure for BOK to act has eased somewhat,” said Krystal Tan, an economist at Australia & New Zealand Banking Group Ltd. “Additional monetary support is likely to come in the form of government bond purchases to support the fiscal expansion.”

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Since the pandemic began this year, the BOK has slashed its key rate to a record and extended liquidity to companies and financial markets. It has also beefed up bond purchases to keep yields low as the government unleashed fiscal spending.

Despite the stimulus, the central bank expects the economy to contract 1.3% this year. It next updates the forecast in November.

Investors will likely focus on how Governor Lee Ju-yeol interprets recent economy trends at his briefing after the decision, and what tools he can use should conditions deteriorate.

BOK’s Next Steps

While exports rose in September, the virus raging across the world means any rebound will be gradual. A recent acceleration in inflation has partly been skewed by floods driving up food prices. South Korea’s won has also been appreciating, which is negative for exporters’ competitiveness.

Governor Lee maintains there’s still room for another cut, but he has also said the rate is close to the lower bound. Analysts see rising home prices and mounting debt among households as major hurdles for the bank to further push down rates.

Lee has said the bank can use non-rate tools if needed, but has offered few signs that the BOK is close to adopting full-scale quantitative easing.

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