"Bank of Korea Likely to Keep Base Rate Steady in October... Maintaining Monetary Easing Stance"

On the 14th, Bank of Korea Monetary Policy Committee
Difficult to further cut rates amid rapid asset price surge
Likely to maintain current easing stance until economic recovery confirmed

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] As the Bank of Korea's Monetary Policy Committee is set to decide the base interest rate on the 14th, experts are leaning towards the committee maintaining the base rate at the historically low level lowered in response to the shock caused by the novel coronavirus disease (COVID-19).

Although the economy remains sluggish, the interest rate has dropped to an annual 0.50%, leading to a rapid surge in asset prices such as real estate and stocks, making further rate cuts impossible. However, it is also analyzed that it is not yet time to withdraw the accommodative policy. Economic indicators show slight improvements, such as consumer prices rising more than expected, but these may be temporary effects caused by the rainy season and typhoons. Raising rates could shock companies and households that have increased their borrowing.

Robert Carnell, head of Asia-Pacific research at ING, stated, "Although the Bank of Korea indicated in August that it could continue to use policies to stimulate the economy, considering the recent rapid rise in housing prices in Korea, there appears to be no possibility of further base rate cuts." Currently, due to the impact of soaring asset prices, there is no chance of lowering rates further.

However, it is also pointed out that raising rates would be premature. Nomura forecasted that although Korea's consumer prices rose more than expected last month, accommodative policies will not change. According to Dow Jones, Nomura expects the consumer price inflation pressure, driven by food (agricultural products), to be temporary and to ease again by the end of the year.

The Statistics Korea announced that the consumer price index for September was 106.20, up 1.0% compared to the same period last year. Nomura expects the Bank of Korea to maintain the base interest rate at the current 0.5% level until 2021.

Seungwon Kang, an analyst at NH Investment & Securities, said, "Although the export indicator based on customs clearance in September turned positive, a somewhat conservative economic outlook is maintained," and predicted that the Bank of Korea would continue its current monetary policy.

While economic indicators and consumer sentiment are gradually improving, it is difficult to say the economy has fully recovered, so the stance is that the interest rate must be kept unchanged. Concerns about a second wave of COVID-19 continue, and experts also expect the low base interest rate to be maintained until next year due to projections that the spread of COVID-19 could be prolonged if a vaccine is not developed by then.

According to a survey by FocusEconomics targeting experts, the average forecast for this year's base interest rate by the Bank of Korea is 0.46%. Although there is a slight possibility of further cuts, it is very minimal. The forecast for next year's base interest rate is 0.51%.

Meanwhile, the Monetary Policy Committee, which decides the base interest rate within this year, has two remaining meetings on the 14th and November 26th.