S Korea central bank holds rates, but cuts GDP forecast on Covid concerns

By Cynthia Kim and Joori Roh

SEOUL (Reuters) - South Korea's central bank kept its key policy rate unchanged on Thursday, holding fire in the face of rising home prices, even as it cut its 2020 GDP forecast on concerns about the fallout of the coronavirus pandemic on Asia's fourth largest economy.

The Bank of Korea kept the seven-day repurchase rate at a record low 0.50%, as expected by all 26 economists surveyed by Reuters, after delivering 75 basis points worth of rate cuts so far this year.

The BOK is walking a tight rope as it tries to balance the need for more stimulus with the risk that further rate cuts could encourage more cheap borrowing and worsen a home buying frenzy.

The bank also sharply downgraded its economic projection, expecting gross domestic product to shrink 1.3% this year, from a previous forecast for a 0.2% fall. It raised the inflation forecast for 2020 to 0.4% from 0.3% previously.

Markets largely shrugged off the decision, looking ahead to the central bank governor's news conference at 0220 GMT.

The pandemic pushed South Korea's economy into its worst recession in over 20 years in the second quarter and analysts worry this could drag into the third quarter as the government considers imposing the highest level of physical distancing rules as coronavirus cases rise.[nL3N2ET27Y]

South Korea had been more successful than many of its peers in containing the virus, managing to avoid a full-blown lockdown, but has suffered a setback this month when coronavirus-positive members of a church attended a political demonstration and spread it to others.

Rapidly rising property prices, led by soaring apartment costs in Seoul despite several rounds of cooling measures, have also put policymakers in a bind.

The policy meeting comes as the government and opposition debate a fourth extra budget to bolster the 277 trillion won ($233.82 billion) worth fiscal stimulus pledged this year to soften the economic blow from the virus.

($1 = 1,184.6800 won)

 

(Additional reporting by Jihoon Lee; Editing by Ana Nicolaci da Costa)