MNI PREVIEW: BOK To Hold, But New Restrictions Impact Concerns

The Bank of Korea will likely keep its policy rate unchanged at a record low 0.5% as the economy is improving but it remains cautious about the outlook as the government has toughened social distancing rules to deal with the coronavirus pandemic.

Financial markets aren't pricing in any policy move ahead of the Nov. 26 meeting, although BOK Chairman Lee Juyeol has previously said there is room for a rate cut.

There is speculation that the BOK will expand unconventional measures in future to lower long-term interest rates, but some board members continue to be concerned about financial imbalances, including the rise in real estate prices caused by its easy policy.

The government has indicated it will tighten social distancing rules further if the rate of infections across the country fails to decline.

RISKS

Downside risks are increasing for South Korea's economy as global conditions worsen in the wake of recent lockdowns in major European economies, the Korea Development Institute has warned.

"Despite a modest recovery in manufacturing, the Korean economy shows a continued contraction, mainly in the service industry, and downside risks are high over accelerating Covid-19 (infections) in Europe," KDI said in its November monthly economic trends report.

South Korea's annual inflation rate slowed in October and the core rate declined at its fastest pace in over 21 years as the pandemic dampened domestic demand. A temporary government subsidy on mobile phone bills also weighed on the data.

The consumer price index rose 0.1% in October from a year earlier, Statistics Korea data showed, sharply slowing from +1.0% in September.

Core CPI for October, excluding volatile energy and food prices, declined 0.3% y/y, marking the sharpest fall since September 1999.

Exports fell 3.6% y/y in October for the first drop in two months as business days declined due to holidays. Exports of semiconductors (+10.4%) and automobiles (+5.8%) remained solid.

South Korea's exports are expected to be supported by the Chinese economic recovery.