SEOUL, Oct. 19 (Yonhap) — Global credit appraiser Fitch Ratings said Monday that it expects South Korea’s central bank to cut its policy rate by a quarter percentage point this year to support the pandemic-hit economy amid tamed inflation.

The Bank of Korea (BOK) will hold this year’s final rate-setting meeting on Nov. 26 after it froze the key interest rate at the record low of 0.5 percent in October.

The bank cut the policy rate by a total of 75 basis points in March and May to support the economic growth.

“We expect an increase in inflation to be quite gradual and that could lead the BOK to cut the policy rate again on growing risks globally,” Jeremy Zook, director of Fitch’s Asia-Pacific Sovereigns, said during a webinar.

He said a prolonged period of low borrowing costs is expected to put upward pressure on Korean households’ high indebtedness.

Fitch expected the South Korean economy to contract 1.1 percent this year before rebounding 3.7 percent next year. The BOK forecast Asia’s fourth-largest economy would retreat 1.3 percent this year and grow 2.8 percent in 2021.

As for South Korea’s fiscal soundness, Fitch said the country has room in responding to the economic fallout from the new coronavirus outbreak, but over the medium term, it will face fiscal challenges due to rapidly aging population.

“We expect the general government’s fiscal deficit will rise (to) 4.4 percent (of gross domestic product) in 2020. Compared to its peers, it is a relatively modest deterioration,” Zook said.

“But over the medium term, we do see some fiscal challenge for Korea. Korea is one of the most rapidly aging populations in the world,” he said.

Fitch said it has no threshold of a country’s debt-to-GDP ratio that triggers a change in its credit rating, as there are many factors to be considered in revising sovereign ratings, such as macroeconomic situations.

The agency viewed South Korea’s proposed new fiscal rules as a “positive” signal that the government is trying to manage public finance debt in a sustainable manner.

South Korea recently unveiled the proposal that will limit its debt to 60 percent of gross domestic product (GDP) and its fiscal deficit to 3 percent from 2025. The new rule is subject to parliamentary approval.

“(The announcement of the fiscal rule) is a positive signal that the government is considering medium-term debt sustainability in its plan,” he added.

Early this month, Fitch maintained South Korea’s credit rating at “AA-,” the fourth-highest level of the agency’s sovereign ratings, with a stable outlook.