The South Korean economy is expected to shrink less this year, despite a resurgence of COVID-19, Bank of Korea (BOK) Governor Lee Ju-yeol said yesterday, while issuing a warning over rapid won gains that could undermine the recovery.
“The negative impact from the resurgence of the virus is still big, but exports will likely outweigh that,” Lee said at a briefing after the central bank board unanimously agreed to maintain its seven-day repurchase rate at 0.5 percent and upgraded its growth forecasts.
The BOK is ready to step in and stabilize currency markets if any herd-like behavior was seen, he said.
“It’s true that the [US] dollar-won exchange rate has fallen faster compared with other major currencies,” Lee said.
South Korea’s economy has been on a recovery path, but now faces increased headwinds. Social distancing rules have been tightened as daily infections surged, exceeding 500 yesterday.
Worsening outbreaks in major economies, along with a strong won, also threaten to undermine a rebound in South Korean exports.
In a statement after the decision, the BOK said that the economy is likely to recover gradually, led by exports and investment, though uncertainties remain high.
It noted a pickup in household debt growth and increases in nationwide housing prices, while pledging to maintain accommodative policy.
The central bank now sees the economy contracting 1.1 percent this year and growing 3 percent next year, both 0.2 percentage points higher than it expected in August.
Lee said the BOK assumed that the global spread of COVID-19 would stabilize after the middle of next year.
“Even considering the latest virus wave, the BOK likely sees the trajectory of recovery since May intact,” SK Securities economist An Young-jin said. “But the recovery is inevitably going to slow in the short term.”
South Korea was seeing signs of green shoots before the latest COVID-19 wave, with stronger exports hauling the economy out of a pandemic-triggered recession last quarter.
Confidence among consumers and businesses was also improving, while industrial output started to rise above year-earlier levels.
The won has been among the best performers in Asia this quarter, appreciating more than 5 percent against the US dollar.
It traded at 1,105.90 against the greenback as of 12:09pm yesterday, stronger than the 1,133 level seen as a profit-or-loss threshold by exporters in a trade association survey this month.
Lee said that while the exchange rate’s impact on export performance is less than before, currency volatility adds uncertainty to companies.
The central bank has reduced its benchmark rate by 75 basis points this year to blunt the impact of the pandemic, in addition to providing liquidity and purchasing bonds to stabilize markets.
Lee said that while the fast pace of household debt rise is concerning, the BOK is not considering reducing policy accommodation at this stage.
The central bank held back the release of plans for its regular bond purchases for next year.
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