South Korea: BoK seen on hold for the rest of the year – UOB

UOB Group’s Economist Ho Woei Chen, CFA, reviewed the latest interest rate decision by the Bank of Korea (BoK).

Key Quotes

“The Bank of Korea (BOK) kept its benchmark Base Rate unchanged at 0.50% … in line with consensus and our expectation. The rate decision today was unanimous. Year-to-date, the BOK has cut the benchmark rate by 75 bps.”

“Although BOK highlighted a highly uncertain economic outlook and said it is likely to further downgrade its GDP forecast for this year, we think that the interest rate has reached a bottom and it will take a significant weakening in outlook for them to reconsider lowering rates further. Governor Lee Ju-yeol had earlier said that the policy rate is now very close to the ‘effective lower bound’. The central bank also reiterated the availability of non-interest rate tools today, saying that it stands ready to purchase government bonds if there is volatility in yields and may extend its repo operations.”

“On the fiscal front, the increased spending under President Moon Jae- in’s “New Deal” program over the next five years indicates that fiscal policy will also have a major role to play in the economic recovery, taking some pressure off expectation of further monetary easing.”

“As such, we maintain our call for the BOK to keep the current record low rate unchanged for the rest of 2020. The BOK also made it clear that the accommodative monetary policy will remain until the economy recovers which we think could take more than a year.”