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South Korea's central bank holds rates but leaves door open for future cuts

·2 min read
FILE PHOTO: The logo of the Bank of Korea is seen on the top of its building in Seoul

By Cynthia Kim and Joori Roh

SEOUL (Reuters) - South Korea's central bank held its policy interest rate at a record low on Thursday but signaled strong appetite for further cuts and unconventional policy to combat the economic hit from the coronavirus pandemic.

The Bank of Korea slashed interest rates by 50 basis points to a fresh low of 0.75% on March 16, in its largest policy easing since the global financial crisis.

On Thursday, Governor Lee Ju-yeol said another cut could be necessary as the bank sees Asia's fourth-largest economy posting growth of less than 1% this year, below its earlier projection of 2.1%. The new projection assumes the global spread of the coronavirus slows significantly in the second quarter.

"We have some policy room left, so policy response could be made as much as is warranted," Governor Lee Ju-yeol said in a livestreamed press conference.

Lee also said setting up a special purpose vehicle to make loans to eligible companies could stabilise markets if coupled with government credit guarantees, a tool used by the U.S. Federal Reserve. He also said the bank plans to increase outright purchases of government bonds.

June futures on three-year treasury bonds were sharply higher, pushed up by Lee's strong hints about further easing and bond buying.

Fifteen of 20 economists surveyed by Reuters expect the BOK to stand pat on Thursday.

Some economists say South Korea is heading for a contraction in the first half as factory activity fell at its fastest pace in 11 years in March.

Virus fears made South Korean consumers the most pessimistic in more than a decade, while exports have shrunk as the coronavirus ravaged the global economy and supply chains.

South Korea has had some success in containing its epidemic, with daily new infections at about 50 this week, well off the peak of more than 900 in late February. Total infections were at 10,384 as of midnight Tuesday. But weakness in foreign demand for Korean goods is set to worsen in the coming weeks as the pandemic heightens the prospect of a global recession.

"Investors saw the governor's remarks that the bank still has policy room as dovish, which the markets took as a signal for a further rate cut," said Kong Dong-rak, an economist at Daishin Securities.

South Korea's government on Wednesday pledged to expand stimulus to follow the 100 trillion won ($82 billion) rescue package to save companies hit by the coronavirus and put a floor under crashing bond markets.

Thursday's rate review was the last for four of the BOK's seven voting board members, as their terms expire on April 20.

The bank is expected to announce nominations for new board members, who need to be appointed by President Moon Jae-in.

($1 = 1,219.6700 won)

(Editing by Sam Holmes)