The Bank of Korea yesterday cut its growth forecast and held its policy rate at a record low amid mounting pressure on policymakers to take more action to counter the economic hit amid the COVID-19 pandemic.
The South Korean central bank maintained its seven-day repurchase rate at 0.5 percent, as predicted by all 22 analysts surveyed by Bloomberg.
The bank said it now expects the economy to shrink 1.3 percent this year, far worse than the 0.2 percent contraction it forecast in May.
The bank’s hold on rates underscores the balancing act it faces, as it remains wary of adding stimulus that could further fuel property gains while the economic toll from the pandemic becomes evident.
Bank of Korea Governor Lee Ju-yeol said that there is still room to cut rates more, but caution is needed as there could be side effects from further reductions and the central bank has other policy tools.
It would purchase government bonds should yields become volatile, Lee said, but he did not offer details on the scale and timing of such action.
“Disappointment apparently grew about direct bond purchases as the market digested Lee’s comments,” said Theo Huh, an analyst at Samsung Futures Inc. “The governor is being seen as passive about market stabilization.”
South Korea’s 10-year bond yield rose slightly to 1.44 percent as of 2:09pm in Seoul, having declined earlier.
The won appreciated 0.1 percent to 1,185.55 per US dollar.
In a statement released after the decision, the central bank said that uncertainties around the growth path are “very high” and the board would keep policy accommodative as the pandemic saps demand-side inflationary pressure.
In its updated forecasts, the bank said its sees inflation picking up slightly to 0.4 percent, from 0.3 percent earlier.
“The cut in the growth forecast speaks to falling demand,” SK Securities economist An Young-jin said. “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.”
So far this year, the bank 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 bank lowering its projection by a significant margin shows that it sees stimulus falling short of offsetting the fallout from the pandemic.
For now, Lee offered little guidance other than reiterating the central bank’s previous stance on bond purchases.
Lee also said that he is not considering measures such as yield-curve control at the moment.
Any further stimulus would have to be carefully implemented as not to run counter to efforts by the South Korean government to curb property prices, including a series of regulations on home purchases and ownership.
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