On Thursday, South Korea’s central bank maintained monetary policy constant but hinted at tightening, taking a minor step toward ending the country’s record-low interest rate run. In a policy statement, the Bank of Korea said it will “evaluate whether it is prudent to adjust the degree of accommodation” after keeping the benchmark interest rate at 0.50 percent, as all 36 analysts polled by Reuters expected.
It anticipates private spending to slow temporarily as a result of the country’s biggest coronavirus outbreak, but it maintains its 4 percent GDP forecast for this year.
South Korea is expected to be the first Asian country to hike interest rates, according to economists. In June, Governor Lee Ju-yeol stated that policymakers will begin normalizing interest rates this year to address the risk of asset bubbles and inflation exceeding the central bank’s target of 2%. However, analysts fear that the development of more contagious COVID-19 varieties could rule out a tightening in the near future, as the strictest restrictions in place in the greater Seoul area since Monday could postpone recovery from the country’s worst recession since 1998. For more than a week, daily infections topped 1,000, thanks to the extremely infectious Delta strain, making it the country’s biggest coronavirus outbreak to date.
“In the policy statement, the BOK maintained its hawkish tone,” said Yoon Yeo-sam, an analyst at Meritz Securities. “The bank’s statement that it will assess if any adjustments are necessary suggests that its earlier intentions (for tightening) are likely to remain intact.” The BOK still has three rate decisions to make this year, the most recent of which is scheduled on August 26. South Korea’s economic recovery has gotten a head start thanks to a total of 75 basis point reduction since last year and the government’s fiscal support, putting the BOK at the vanguard of stimulus removal. According to the BOK, the economy will grow at a rate of 4% this year, the fastest since 2010, as the export recovery takes steam and the labor market tightens.
Investors who have been betting on a rate hike in recent weeks are waiting for Governor Lee Ju-press yeol’s conference at 0220 GMT on Thursday to see if there are any dissenters to Thursday’s rate decision.
Dissenting votes on the policy board’s seven-member panel usually result in policy changes in the following months.
(Cynthia Kim and Joori Roh contributed reporting; Sam Holmes edited the piece.)/n
