|Bank of Korea Governor Lee Ju-yeol attends the bank's monetary policy meeting held in the bank's headquarters, downtown Seoul, Thursday. Yonhap|
Key interest rate frozen at 0.5%
By Kim Yoo-chul
The Bank of Korea (BOK) left its key interest rate unchanged Thursday, although its governor said revisions to GDP will be "unavoidable" as the global spread of COVID-19 is accelerating.
"The BOK lowered the country's economic growth in the second quarter of this year because of worsening exports. The BOK earlier thought the global spread of COVID-19 would have been tamed, although we aren't ruling out the possibility the speed of the virus spreading was heading toward the worst," BOK Governor Lee Ju-yeol told reporters in a news conference after the rate decision.
The central bank kept its benchmark rate steady at a record low of 0.5 percent at its June monetary policy meeting, after slashing a total of 75 basis points since March this year in a bid to fight the effects of the pandemic.
In May, the bank foresaw the Korean economy contracting 0.2 percent this year and inflation slowing to 0.3 percent based on assumptions that the pandemic would peak in the second quarter of this year. But Lee said it's unlikely the economy will contract 1.8 percent this year which the bank presented in May as the worst case.
Considering the continued instability of both internal and external economic conditions and the overheating domestic property market, the BOK chief said the bank will also maintain an "accommodative monetary policy stance" for a while.
"We don't know when the pandemic-initiated crisis will end and it's also uncertain to predict the whereabouts of the country's economy. It's inevitable to maintain the current accommodative policy and I don't think it's the right time for discussions on how to absorb liquidity in a way to normalize the monetary policy," Lee told reporters.
With regard to the bank's assessment in the property market, the BOK chief said chances are low that housing prices will rise further thanks to the impact of the government's recent strong measures and its firm willingness to stabilize the domestic housing market.
"Over the real estate market, it would be desirable to respond by utilizing tools and measures. It's important to create productive investment places to prevent liquidity from further going to the asset market. Housing prices in Seoul and metropolitan areas are accelerating, again," Lee said. But the governor denied Thursday's rate freeze decision was due to the rising housing prices.
Providing affordable housing prices has been one of President Moon Jae-in's core policies since he took power in 2017 with a commitment to address socio-economic inequality. But record-low interest rates to save the local economy are leading investors to invest more in the property market causing a heavy mismatch of supply and demand in popular areas.
Regarding the specifics on how the Korean New Deal and possible third supplementary budget policy will impact the bond market, the governor remained cautious. "It's too early to talk about the estimated impact of the Korean New Deal plan on the bond market," he said. "However, rate volatility may be limited as the effects of previous supplementary budgets have already been factored."
But he didn't specify about its possible actions to apply non-interest rate policy tools, should the economy deterioration be wider than expected. Earlier thoughts by economists are that the BOK will purchase more bonds if the economy worsens affecting the bonds' yield curve.