By Cynthia Kim and Joori Roh
SEOUL (Reuters) – South Korea’s central bank kept monetary policy unchanged on Thursday as the country battles a spike in infections that threatens to derail policymakers’ plans to dial back stimulus this year.
The Bank of Korea (BOK) held the benchmark interest rate at a record low of 0.50%, as expected by all 36 analysts surveyed by Reuters.
Economists expect South Korea to be the first in Asia to raise interest rates. Governor Lee Ju-yeol in June said policymakers will start normalising interest rates this year to address the risk of asset bubbles and as inflation spiked over the central bank’s 2% target.
But the emergence of more contagious COVID-19 variants could rule out an imminent tightening, analysts say, as the toughest restrictions yet in place since Monday in the greater Seoul area could delay recovery from its worst slump since 1998.
Daily infections, fuelled by the highly infectious Delta variant, exceeded 1,000 for more than a week — the country’s worst coronavirus outbreak so far.
“The COVID spread is emerging as an obstacle to interest rate hike plans,” said Kim Sang-hun, an analyst at HI Investment & Securities. “A hike is likely in October, especially if the bank upgrades its growth forecast further in August and after some progress on containing the virus.”
The BOK has three rate decisions left for this year, the next one due on Aug. 26.
A total of 75 basis point cuts since last year and the government’s fiscal support have given South Korea’s economic recovery a head-start, putting the BOK at the forefront of stimulus withdrawal.
The BOK sees the economy growing 4% this year, the fastest since 2010, as the recovery in exports is gaining traction and the job market is tightening.
Investors, who ramped up rate hike bets in the past few weeks, are awaiting Governor Lee Ju-yeol’s news conference at 0220 GMT for the names of any dissenters to Thursday’s rate decision.
Dissenting votes at the seven-member policy board typically lead to policy change in subsequent months.
(Reporting by Cynthia Kim, Joori Roh; Editing by Sam Holmes)
