Bank of Korea keeps policy rate unchanged; no signal of further action

The Bank of Korea (BOK) left the benchmark rate unchanged at a record low of 0.5% as expected on July 16, citing the slowing economy and the overheated housing market but delivered no signal of a further rate action.

The unanimous decision followed the two rate cuts made in March and May, which have lowered the base rate by 75 basis points from 1.25%.

"We maintained the benchmark rate to see the impacts of various expansionary fiscal measures and monetary easing steps taken so far on the real economy," said Juyeol Lee, the governor of Bank of Korea.

After the monetary policy meeting, Lee said in a news conference that the South Korean economy would underperform its May projection of  a 0.2% contraction this year, following the double-digit declines in exports in May and June.

Lee noted that the central bank would maintain an accommodative stance because of increased economic uncertainties.

But soaring market liquidity, fueled by record-low interest rates, will give the BOK no room for additional cuts for the remainder of the year, analysts said.

"The Bank of Korea is likely to maintain the base policy rate through the second half of 2020 without any major changes in policy stance," JPMorgan economist Seok Gil Park said in a note.

The broad money supply of M2 surged by 35.4 trillion won ($29 billion) to 3,054 trillion won in May, the biggest monthly rise since the BOK began compiling the data in December 2001.

“If the economy worsens further and more monetary easing steps are needed, we will respond with non-interest rate measures,” the governor said, signalling that another cut from the current base rate would be ineffective.

The monetary policy board said in a statement that it will continue to assess pandemic-related developments and its impact on financial markets as well as the effects of policy measures taken in response to the pandemic.

The record-low borrowing rates have fueled the already overheated housing market by causing an excessive inflow of capital into the market.

Last month, the average sale price for an apartment in Seoul was 925 million won ($768,174), which is a 7.6% increase from the average price of 859 million won from just seven months ago.

"The government released robust policy measures in June and July which will help to curb housing market issues such as excessive pricing and speculations. The central bank will keep a close watch over the policies' impact on the economy," said Lee.

Write to Ikhwan Kim at lovepen@hankyung.com