Bank of Korea interest rate decision expected

The Bank of Korea (BOK) is set to release an interest rate decision today.

Analysts expect the BOK to leave its interest rate unchanged after it slashed its benchmark to a record-low 0.5% in late May. Despite the minutes from the May 28 meeting, which tabled the possibility of future cuts in the event of a COVID-19 exacerbation, leadership is unlikely to utilise its current wiggle room for further rate change. Record borrowing expansion in June fuelled a resultant rise in property prices, likely precluding the possibility of further cuts throughout the remainder of the calendar year.

The South Korean government has tightened loan rules, extended special administrative zones in which stricter property rules apply and increased taxes on multiple homeowners to rein in house prices, especially in Seoul. This has dragged President Moon Jae-In’s approval downwards, potentially complicating his party’s attempt to retain the presidency in 2022.

Expect the South Korean economy to contract this year for the first time since 1998, with the BOK and the International Monetary Fund forecasting a 0.2% and 2.1% contraction, respectively. As further rate cuts are off the table, expect the BOK to engage in quantitative easing techniques if necessary; this would entail purchases of long-term government bonds and other financial instruments to buttress liquidity and bond prices within domestic markets.

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