South Korea central bank holds rates at record low, but paints bleak outlook

By Cynthia Kim and Joori Roh

SEOUL (Reuters) - South Korea's central bank kept its key policy rate on hold on Thursday, avoiding the risk of fuelling runaway property prices amid government efforts to tamp down on demand in the sector.

Governor Lee Ju-yeol also painted a bleak outlook for the trade-reliant economy due to weaker exports, suggesting the BOK was likely to hold back its monetary policy ammunition for a long-haul fight against the coronavirus pandemic.

"We assessed that revisions (to GDP) would be unavoidable, as global spreading (of the virus) accelerated even in July," Lee told a news conference after the central bank held the base rate steady at a record low of 0.5%, as forecast by all 30 economists polled by Reuters.

The rate is at the lowest since it adopted the current system in 1999, having slashed a total of 75 basis points since March this year to fight the fallout from the pandemic.

In May, the BOK trimmed its 2020 economic projections for Asia's fourth-largest economy to a 0.2% decline, the worst since 1998 during the Asian financial crisis.

Lee said a slower recovery in exports and global resurgence of coronavirus cases meant the economy would face a deeper contraction than earlier forecast.

"Home prices in Seoul and metropolitan area are accelerating again. The BOK too will closely monitor the impact of government policies and (watch out for) financial stability."

The central bank has been working in tandem with the government to extend liquidity to businesses hit by the health crisis but is wary of rising debt and high property prices.

Soaring apartment costs in Seoul despite more than 20 rounds of cooling measures have put policymakers in a bind. "Further cuts are unlikely, in our view, as the Korea economy experienced the worst of the shock in the second quarter, and housing prices continue to rise amid ample liquidity provided by earlier cuts," said Park Chong-hoon, head of research at Standard Chartered Bank Korea.

Governor Lee said the central bank was ready to ramp up buying of sovereign bonds should local bond yields spike with the increased supply in the market.

With inflation seen benign and job growth sluggish, a total of 24 analysts who provided forecasts for end-2020 predict interest rates will stay at a record low of 0.50% through the end of the year.

(Editing by Jacqueline Wong)