SEOUL, Aug. 27 (Yonhap) — South Korea’s central bank froze the key interest rate at a record low of 0.5 percent Thursday as it seeks to gauge growing economic fallout from the coronavirus pandemic amid tame inflationary pressure.
As widely expected, the Bank of Korea (BOK)’s monetary policy board stood pat on the benchmark seven-day repo rate for the second straight occasion.
The BOK cut the policy rate to the record low in May after delivering an emergency rate cut of half a percentage point to 0.75 percent in March to cushion the impact of the new coronavirus outbreak. In July, the central bank also kept the rate at the current level.
In the wake of the COVID-19 pandemic, the South Korean economy showed some signs of recovery on eased slumps in exports and domestic consumption, backed by firm outbound shipments of key items, such as chips and massive fiscal spending.
But the recent spike in virus cases has upped downside risks facing Asia’s fourth-largest economy, underscoring the central bank’s earlier outlook that the economy will likely undergo a sharper-than-expected contraction this year.
South Korea reported 320 more cases of COVID-19 on Wednesday, with nearly 3,500 new cases across the nation identified over the past 13 days.
Earlier this week, BOK Gov. Lee Ju-yeol told lawmakers that he does not rule out the possibility of the Korean economy contracting around 1 percent in 2020 and the pace for economic recovery will remain weak.
The BOK will unveil its revised economic outlook later in the day. In May, the bank forecast the Korean economy to retreat 0.2 percent this year and grow 3.1 percent next year.
Asia’s fourth-largest economy contracted 3.3 percent in the second quarter from three months earlier after shrinking 1.3 percent on-quarter in the January-March period.
The economy’s second straight quarterly fall came as exports, which account for 50 percent of the Korean economy, tumbled amid global lockdowns caused by the virus outbreak.
South Korea’s subdued inflation and still-high housing prices also appeared to warrant the BOK’s rate freeze this month, experts said.
The country’s consumer prices rose 0.3 percent in July from the previous year, marking the first upturn in three months. The BOK aims to keep inflation at 2 percent over the medium term.
Despite the government’s measures to control rising home prices, the housing market has yet to be stabilized.
Household credit hit a record high of 1,637.3 trillion won (US$1.38 trillion) in June on the back of banks’ home-backed lending.
Experts said the BOK is expected to keep the policy rate steady throughout this year as it faces limited room for further rate cuts.
“Despite the pandemic-caused uncertainties, the policy rate is expected to be frozen for a considerable period of time due mainly to limited room for further cuts,” said Kim Sun-tae, an economist at KB Kookmin Bank.
Gov. Lee earlier said the base rate has yet to reach the lower boundary but agreed this year’s two rate reductions may have sent it much close to such a limit.
Analysts said the BOK may focus on non-conventional policy tools, such as state bond purchases, rather than rate cuts, in a bid to respond to the economic slump caused by the COVID-19 pandemic.