BOK likely to freeze key rate this week

Bank of Korea Governor Lee Ju-yeol bangs a gavel at a monetary policy meeting held Aug. 27. The central bank is expected to freeze the key rate at the rate-setting meeting scheduled for Wednesday. / Korea Times file

By Kim Bo-eun

Forecasts for Korea's economic growth rate this year have been downgraded in recent months, but the Bank of Korea (BOK) is likely to keep the key rate at 0.5 percent for the time being, according to experts, Sunday.

The BOK's monetary policy board will convene on Wednesday to reach a decision on the key rate.

The central bank in August lowered its forecast for Korea's economic growth this year to -1.3 percent, from its earlier outlook of 0.2 percent presented in May. The OECD forecast last month that Korea's GDP would shrink by 1 percent, a larger retreat from its estimate of a slightly smaller 0.8 percent contraction in August.

Despite lowered forecasts based on the resurgence of COVID-19 in August, views are that a further rate cut is unlikely given the surge in asset prices amid the historically low interest rate.

The BOK cut the key rate by 0.5 percentage points in March to 0.75 percent and by an additional 0.25 percentage points to 0.5 percent in May. The central bank froze the key rate in July and August.

The lowered key rate has led to a surge in loans for investments in real estate and stocks, leading to a spike in asset prices.

Banks' household loans increased by 11.7 trillion won in the month of August, which was the largest rate of increase in a single month.

BOK Governor Lee Ju-yeol said following the monetary policy meeting in July that the key rate has neared the lowest rate to which it can be cut.

In August, the governor said at the National Assembly that the BOK "plans to ease monetary policy to support domestic economic recovery."

"Based on current circumstances, the central bank does not have many policy tools at its disposal," said Park Chong-hoon, chief economist at Standard Chartered Bank Korea.

"In order for the BOK to use such tools, indices would need to show volatility, but indices of exports, industrial production and employment have shown stability.”

He noted that the central bank would likely maintain its policy stance, observing for possible volatilities, as uncertainty exists due to the U.S. presidential election scheduled to take place on Nov. 3.

A rate freeze for the time being by the BOK is also likely, given the Federal Reserve has stated plans to keep near-zero rates through 2023, to help the U.S. economy recover from the coronavirus.

"While there are burdens such as excess liquidity flowing to asset markets; the gap between capital markets and the real economy; the growth of household debt and firms in poor condition; limited economic recovery and the Fed's maintenance of zero interest rates are expected to serve as the background of a key rate freeze," the Hana Institute of Finance stated in a report released last week.