Bank of Korea governor Lee Ju-yeol said the economy will likely shrink less than expected this year despite the worsening pandemic, though he issued a warning over rapid won gains that could undermine the pace of recovery.
“The negative impact from the resurgence of the virus is still big, but exports will likely outweigh that,” Lee said at a briefing after the central bank board held the seven-day repurchase rate at 0.5% yesterday and upgraded its growth forecasts.
While taking a cautiously optimistic view on the strength of the recovery, Lee said the central bank stood ready to step in and stabilise currency markets if any herd-like behaviour forced sharp moves in the won. He noted that the South Korean currency has been appreciating at a faster pace than major currencies.
The central bank’s stronger growth projections and Lee’s comments suggest the hurdle for another rate cut is high, especially as the country continues to see fast gains in household debt and nationwide increases in housing prices.
Most economists expect the BoK to remain on hold through at least end-2021, before considering increasing rates.
“Even considering the latest virus wave, the BoK likely sees the trajectory of recovery since May intact,” said An Young-jin, an economist at SK Securities. “But the recovery is inevitably going to slow in the short term.”
The central bank now sees the economy contracting 1.1% this year and growing 3% next year, both 0.2 percentage point higher than it expected in August, led by investment and exports. Lee said the BoK assumed that the global spread of Covid-19 would stabilise starting from mid-2021.
Still, alongside developments in the pandemic and vaccine production, an appreciating currency could also affect the pace of the recovery.
The won has been among the best performers in Asia this quarter, appreciating nearly 6% against the dollar. It strengthened a touch to 1,105.90 against the dollar as of 2.10pm yesterday, pushing it further beyond the 1,133 level seen as a profit-or-loss threshold by exporters in a trade association survey this month.
Governor Lee said while the exchange rate’s impact on export performance is weaker than before, currency volatility would add to elevated levels of uncertainty for companies.
Stronger exports helped haul the economy out of a pandemic-triggered recession last quarter. But headwinds have been rising, with local social distancing rules tightened as daily infections surged, exceeding 500 yesterday. Worsening outbreaks in major economies also threaten to undermine a rebound in Korean exports.
Despite its slightly rosier view for the economy, the BoK acknowledged that jobs were still being lost at a sharp rate.
Asked about a push by a group of lawmakers to add an employment goal to the BoK’s existing mandate of financial and consumer-price stability, the governor said there were limits to what the bank could do and a potential for conflicts among the different goals.
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