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Korea Monetary Policy February 2021

Korea: BOK keeps rates at all-time low in February

At its meeting on 25 February, the Bank of Korea (BOK) kept the base rate at its record low of 0.50%, in line with market expectations.

The Bank’s decision to hold came amid lingering Covid-19 cases, which have supressed activity at home. Meanwhile, inflation has remained downbeat in recent months, and the ongoing impact of the global resurgence in coronavirus cases in late December and early this year likely also influenced the decision. Meanwhile, concerns over debt levels and surging property prices—which have continued to rise since the previous meeting—discouraged the Bank from providing further monetary easing.

In its press release, the BOK stated it would maintain its accommodative policy on expectations of a timid recovery and limited inflation. However, due to concerns over financial stability there is likely little room for further rate cuts, with our panel seeing the BOK keeping rates unchanged until the end of this year. That said, further easing could be delivered through other channels, as Governor Lee hinted at more regular bond-buying, which aims to maintain financial stability.

On the subject, analysts at Nomura commented:

“Given expectations of higher bond supply, there has been mounting pressures on the BOK to immediately launch a large-scale KTB purchase plan to stem interest rates from rising further. […] However, disappointingly, the BOK remains hesitant to embark on a KTB purchase program […]. In our view, it will be difficult for the BOK to stick to the status quo, considering labor markets have suffered unprecedented job losses. Thus, we believe the BOK is likely to announce a small amount (~KRW2trn) of KTBs purchases initially, once the fiscal stimulus is rolled out (likely in early Q2).”

The next monetary policy meeting will be held on 15 April.

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