South Korea central bank keeps benchmark policy rate on hold

South Korea’s central bank (CB) kept its benchmark policy rate on hold on Thursday, avoiding the risk of fuelling runaway property prices amid government efforts to tamp down on demand in the sector.

Governor Lee Ju-yeol also painted a bleak outlook for the trade-reliant economy due to weaker exports, suggesting the Bank of Korea (BOK) was likely to hold back its monetary policy ammunition for a long-haul fight against the coronavirus pandemic.

“We assessed that revisions to GDP would be unavoidable, as global spreading

of the virus accelerated even in July,” Lee told a news conference after the central bank held the base rate steady at a record low of 0.5%, as forecast by all 30 economists polled by Reuters.

The rate is at the lowest since it adopted the current system in 1999, having slashed a total of 75 basis points since March this year to fight the fallout from the pandemic.

In May, the BOK trimmed its 2020 economic projections for Asia’s fourth-largest economy to a 0.2% decline, the worst since 1998 during the Asian financial crisis.

Lee said a slower recovery in exports and global resurgence of coronavirus cases meant the economy would face a deeper contraction than earlier forecast. “Home prices in Seoul and metropolitan area are accelerating again. The BOK too will closely monitor the impact of government policies and watch out for financial stability.”

The central bank has been working in tandem with the government to extend liquidity to businesses hit by the health crisis but is wary of rising debt and high property prices.

Soaring apartment costs in Seoul despite more than 20 rounds of cooling measures have put policymakers in a bind.

“Further cuts are unlikely, in our view, as the Korea economy experienced the worst of the shock in the second quarter, and housing prices continue to rise amid ample liquidity provided by earlier cuts,” said Park Chong-hoon, head of research at Standard Chartered Bank Korea.

Governor Lee said the central bank was ready to ramp up buying of sovereign bonds should local bond yields spike with the increased supply in the market.

With inflation seen benign and job growth sluggish, a total of 24 analysts who provided forecasts for end-2020 predict interest rates will stay at a record low of 0.50% through the end of the year.

Meanwhile, South Korea outlined a plan on Tuesday to spend 114.1 trillion won ($94.6 billion) on a “New Deal” to create jobs and help the economy recover from the coronavirus fallout, anchored in part by “green” investment in electric vehicles and hydrogen cars.

The six-year plan will build digital infrastructure and a stronger safety net for job seekers, but its “Green New Deal” aspects have drawn attention as they aim to cut heavy reliance on fossil fuels in Asia’s fourth-largest economy.

“The coronavirus pandemic once again reaffirmed the urgency of responses to climate change,” President Moon Jae-in said in a speech, adding that the new projects were expected to create about 1.9 million jobs through 2025.

The plan envisages investment in smart grids to manage electricity use more efficiently, promotion of remote medical services, a work-from-home policy for businesses and online schools based on fifth-generation (5G) wireless networks, and tax breaks for telecoms providers who install the systems. First proposed by Moon’s ruling party ahead of the parliamentary election in April, the plan set ambitious goals of net-zero emissions by 2050, an end to funding of overseas coal plants, and introduction of a carbon tax.

But environmental groups criticised the initiatives as light on measures to rein in emissions. “This plan is a half-baked deal that lacks the goal of curbing carbon emissions to net zero by 2050 and a roadmap to reach that,” Greenpeace Korea said in a statement.

A lawmaker helping to draft the legislation, Lee So-young, defended the lack of a nationwide timeline to phase out vehicles with internal combustion engines, saying it could be challenging for major auto exporters such as South Korea to adopt one.

“It’s easier for auto-import oriented countries like the United Kingdom to set a timeline,” she said. South Korea aims to have 1.13 million electric vehicles (EVs) and 200,000 hydrogen cars on the roads by 2025, up from 91,000 and 5,000 each by the end of 2019, Moon said, while the government would add more charging stations for the vehicles.

Hyundai Motor Group leader Euisun Chung said flagship Hyundai Motor and sibling Kia Motors aim to sell 1 million EVs in 2025, together targeting more than a tenth of global market share.

Reuters