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The Bank of Korea will likely keep its policy rate unchanged at a record low as the economy is improving but it will remain cautious about the outlook amid the uncertainties caused by the resurgent coronavirus.
Financial markets aren't pricing in any move at Friday's meeting. The policy rate has stood at 0.5% since late May.
In a New Year message, Chairman Lee Juyeol said policy will remain accommodative to support the economy and that he expects the inflation rate to stay below target for a while. The bank will be focused on labour market conditions in managing monetary policy in future, he added.
There is speculation the BOK will expand unconventional measures in future to lower long-term interest rates, although Lee and some board members continue to be concerned about financial imbalances, including the rise in real estate prices.
BOK officials are also watching to see how the decision to extend social distancing restrictions in the Greater Seoul area for two weeks affects economic activity, mainly consumer spending. Restrictions will continue until Jan. 17 as the country battles to contain a third coronavirus wave.
South Korea's exports rose 12.6% y/y in December, accelerating from 4.0% growth in November, thanks to recovering global demand for IT-related goods and automobiles. But for year as a whole, exports fell 5.4%.
In its monthly trend report on Monday the government-backed Korea Development Institute said that despite the recovery in manufacturing, the economy "remains subdued led by the service industry." The sluggishness appears to have worsened since mid-November due to the nationwide resurgence of Covid-19 and tighter quarantine measures, KDI said.