South Korea's central bank holds fire on rates; investors eye bond purchase plan

[SEOUL] South Korea's central bank kept interest rates steady on Thursday, maintaining support for a fragile economic recovery while guarding against upward pressure on bond yields from the government's massive stimulus package.

The Bank of Korea held the base rate at a historic low of 0.5 per cent, as expected by all 27 analysts in a Reuters poll.

It also raised this year's inflation outlook to 1.3 per cent from 1.0 per cent previously, and kept its growth outlook at 3.0 per cent.

Investors are looking past the rate decision and focusing on government debt purchase plans as lawmakers draw up another supplementary budget in the coming weeks to aid small businesses and other vulnerable groups hit by the pandemic.

Talk of vaccination programmes and surging exports have put Asia's fourth-largest economy at the forefront of bets for rebounding growth, but the fastest jobs decline in more than two decades shows the recovery remains fragile.

The BOK, like many of its peers, is now under pressure to support a bond market struggling to absorb record debt issuance this year to stop yields surging.

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Governor Lee Ju Yeol may foreshadow steps to help finance state spending at the press conference scheduled for 0220 GMT, says Cho Yong Gu, an analyst at Shinyoung Securities.

"As the fourth crisis support package looks like it could be huge, all eyes are on the bank's plans to buy treasury bonds," said Mr Cho.

"Keeping rates steady is the optimal decision for now, considering concerns from surging asset prices and growing financial imbalances."

South Korea's 10-year bond yields have been rising and are near a two-year high of 1.85 per cent, tracking moves in US yields.

In 2020, the BOK purchased 11 trillion won (S$13.1 billion) in government bonds in order to stabilise markets amid the coronavirus crisis.

REUTERS