MNI STATE OF PLAY: Labor Market Key To BOK Policy Moves

The Bank of Korea remains on watch for a resurgence of Covid-19 infections, despite the South Korean government easing some restriction in recent weeks, standing ready to add additional easing measures at a future point if needed, particularly if the labour market weakens further.

However, this week the BOK looks likely to stand pat on interest rates, leaving them unchanged at a record low 0.5%, a level it has been at since May 2020.

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

BOK officials are watchful for labour market conditions as the service sector remains in a severe condition as social distancing restrictions remain in place. The unemployment rate rose to 5.4% in January, the highest level since 1999, and the number of people employed fell at the sharpest pace in more than two decades as the virus continued to impact the job market.

EXPORTS RECOVERING

South Korea's exports rose 11.4% y/y in January for the third straight monthly rise following a gain of 12.6% in December, boosted in part by recovering manufacturing around the globe.

Exports for the first 10 days in February rose 69.1% y/y, boosted by demand for semiconductors (+57.9%) and autos (+102.4%), offering hopes of strength ahead for the export-led economy. The Korea Development Institute, a governmental entity, said on Feb. 8 that the economy saw domestic demand contract further as the third Covid-19 wave rolls across the country, although improvements in goods exports served to partially buffer the slowdown in economic activity.

"As consumption and employment tumbled on the resurgence, economic activity remained sluggish led by domestic demand."