BOK keeps rate at record-low amid 4th wave of virus outbreaks

South Korea’s central bank on Thursday kept its key policy rate anchored at record-low of 0.5 percent, with the latest wave of COVID-19 infections dampening its path to a hawkish policy.

While some experts have said that a rate hike may come as early as this month, the widely-expected rate freeze decision came during this year’s fifth rate-setting meeting. The Bank of Korea has been keeping the rate at 0.5 percent since May 2020 after slashing it by a combined 0.75 percentage point in the March-May period last year.

BOK Gov. Lee Ju-yeol last month strongly signaled a possible rate hike by the end of the year when the outlook for economic recovery from the pandemic woes seemed rosier. But the fourth wave of COVID-19 here, which has been keeping the nation’s daily infection tally above 1,000 for more than a week, has apparently set obstacles for the possible policy shift. 

The recent developments surrounding the pandemic here
have been putting the BOK in a tricky position, with risks tied to inflationary pressures and the nation’s snowballing household debt continuing to exist amid the fourth wave.

Nodding towards this, Lee told reporters on Thursday that he believes the next monetary policy board meeting will be the place to “discuss and review” whether the current level of monetary expansion should be “adjusted.” Lee’s remark reflects BOK’s move towards monetary tightening.
“Despite the resurgence of COVID-19, the current pace of economic recovery, inflationary pressures and the risk of financial imbalance leads us to believe that it may be time to review our current policy stance,” Lee said.

On the possible rate hike by the end of the year, Lee took a step back and said that the move is “possible but not obligatory or mandatory.”

“The tightened social distancing rules (due to the fourth wave of the virus) could affect the services sector and ultimately the economy in the second-half of the year,” Lee Mi-seon, analyst at Hana Financial Investment said.

“Because of this, the BOK will take a cautious stance in controlling its pace towards a rate hike,” she added. 

Kim Sang-hun, analyst at KB Securities said "the prolonged mood of ultra low interest rate could lead to bigger debt issues -- the market took a hawkish interpretation towards the BOK‘s message today.” 

"If the number daily COVID-19 cases start to drop, then a rate hike could come as early as next month, but if the fourth wave continues then the rate hike could come in October,” he added.

Consumer price inflation has remained high at the mid-2 percent level in the second-quarter due to the rising prices of petroleum products and agricultural, livestock, and fisheries products as well as the accelerating increase in service prices, the BOK said.

South Korea's household credit grew at a slower pace in the first three months of the year, after snowballing at an unprecedented pace throughout last year, as banks tightened rules on loans.

Household credit reached a record high of 1,765 trillion won ($1.56 trillion) as of March, up 37.6 trillion won from three months earlier.

The BOK’s latest forecast says South Korea’s economy will expand by 4 percent this year.

By Jung Min-kyung (mkjung@heraldcorp.com)