South Korea Keeps Rate Unchanged; Cuts GDP Outlook

South Korea's central bank left its key interest rates unchanged at a record low and downgraded its GDP outlook as authorities enhanced coronavirus containment measures.

The Monetary Policy Board of the Bank of Korea decided to hold its key policy rate at 0.50 percent.

As economic growth is expected to be sluggish and inflationary pressures on the demand side are forecast to remain weak due to the covid-19 pandemic, the Board will maintain its accommodative monetary policy stance, the bank said in a statement on Thursday.

Policymakers observed that the recovery of domestic growth is likely to be slower than previously forecast due to the domestic resurgence of Covid-19.

The bank forecast the economy to shrink 1.3 percent this year instead of 0.2 percent projected previously. Uncertainties around the future path of GDP growth are also judged to be very high, the bank said.

At the same time, inflation outlook was lifted to 0.4 percent from 0.3 percent.

It is forecast that consumer price inflation and core inflation will run at the mid-zero percent level this year, reflecting prolonged effects from the drop in global oil prices and weak demand-side inflationary pressures.

With little space left for more policy rate cuts, the BoK is more likely to turn to unconventional measures, Alex Holmes, an economist at Capital Economics, said.

Given that the Bank has already made a vague commitment to reduce "excess volatility" in long term bond yields, the most likely next step is an explicit yield target, which would be more effective in driving down long-term yields and supporting the economy, Holmes added.