Bank of Korea to Hold as Virus Tempers Optimism: Decision Guide

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Bank of Korea to Hold as Virus Tempers Optimism: Decision Guide

Sam Kim
·3 min read

(Bloomberg) --

The Bank of Korea is expected to stand pat on its key rate and seek to stave off concerns about any early tightening as worsening local virus outbreaks threaten to undermine an ongoing economic recovery.

All 20 analysts surveyed by Bloomberg expect the South Korean central bank to keep borrowing costs at an all-time low of 0.5% on Thursday, with a separate poll suggesting an extended hold through at least the year-end.

While buoyant exports and investment are fueling optimism that the Korean economy will grow faster this year than earlier forecast, rising virus cases suggest the recovery will be uneven. The government has warned of tighter social distancing rules should outbreaks continue to worsen, dampening the outlook for the service sector, which employs a majority of Koreans.

“Any arrival of a fourth wave is likely to lead to a tightening of social distancing and weigh on growth,” said Eddie Cheung, an emerging-markets strategist at Credit Agricole in Hong Kong. “It remains too early for the BOK to contemplate any sort of policy normalization as growth is still only just picking up and inflation is not high.”

Bank of Korea Governor Lee Ju-yeol last month said the outlook for 2021 appears better than it did in February, when the bank forecast 3% growth and 1.3% inflation. With an official update due at the May meeting, the focus on Thursday will be if Lee’s assessment has changed in light of the latest virus flareup and the disappointing pace of the vaccine roll-out at home.

With new infections exceeding 500 per day this month, the government has made mask-wearing mandatory anywhere indoors and ordered a temporary shutdown of nightclubs in the country’s two-biggest cities. Stricter rules could snuff out a nascent recovery in consumption that’s just started to bounce back after a year battered by the virus.

Korean Consumers Turn Optimistic for First Time Since Covid

Any changes in Lee’s outlook on the economy, either up or down, are still unlikely to move the needle on near-term monetary policy.

Surging property prices have fueled public discontent, leading to a major defeat for President Moon Jae-in’s party in last week’s mayoral elections and likely taking further easing off the table.

In the other direction, concern about the strength of a jobs recovery hampers the BOK’s ability to tighten to tackle growing financial risks. Moon on Tuesday called for more spending to create employment, saying that many people who have been hit economically by the coronavirus are still in trouble, even as the economy recovers.

“We expect growth to remain the BOK’s priority through 2021 and don’t see any policy rate tightening amid lingering economic uncertainty and a weak labor market.” said Krystal Tan, an economist at Australia & New Zealand Banking Group Ltd. in Singapore.

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