South Korea’s central bank keeps base rate at historic low of 0.5%
Bank of Korea is in no rush to remove monetary stimulus even with inflationary expectations on the rise as the pandemic continues
South Korea’s central bank (CB) has kept the base rate at a historic low of 0.5%, as expected on Thursday. The bank is in no rush to remove monetary stimulus even with inflationary expectations on the rise, as the pandemic continues to cloud the economic outlook.
“It is not appropriate to mention normalising of policies or interest rate hikes for now,” Bank of Korea ( BOK) Governor Lee Ju-yeol said in a news conference.
Lee said the bank raised this year’s inflation outlook to 1.3% from 1.0% previously, but pushed back against bond market bets that emerging inflation could lead to a shit to tighten policy.
The message from BOK echoes earlier statements made by the US Federal Reserve and the Reserve Bank of New Zealand this week, who both signalled that they are nowhere close to removing support for their economies.
Vaccination plans 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 sees the economy expanding 3% this year following a 1.0% contraction in 2020.
Some economists are projecting rate rises from as early as the first half of 2022. Of the 21 analysts who provided long-term forecasts, 12 said they expect interest rates to rise next year while nine saw rates remaining at record lows.
“Further easing is completely ruled out, and the question is when would be normalising begin,” said Yoon Yeo-sam, fixed-income analyst at Meritz Securities. “I think the bank will raise interest rate in the second half of next year, possibly before the Fed.”
South Korean consumers’ inflation expectations for February hit their highest since August 2019, while 10-year bond yields are near a twoyear high at 1.85%, tracking moves in US yields.
Asked about the bank’s plans to purchase government bonds, Lee said details including the timing of any purchase will be announced later, without elaborating.
Investors are focusing on the bank’s 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.
Governor Lee on Tuesday told lawmakers in parliament that the bank is ready to step back into the market to purchase bonds.
In 2020, the BOK purchased 11 trillion won ($9.92 billion) in government bonds in order to stabilise markets amid the coronavirus crisis.
Meanwhile, Hyundai Motor Co will replace batery systems in some 82,000 electric vehicles globally due to fire risks - a costly $900 million recall that lays bare the thorny issue of how car and batery makers split the bill when problems arise.
The recall is one of the first mass batery pack replacements conducted by a major automaker.
“It’s very significant for both Hyundai and LG as we are in the early stages of the electric vehicle era. How Hyundai handles this will set a precedent not just in South Korea but also for other countries,” said Lee Hang-koo, senior researcher at the Korea Institute for Industrial Economics & Trade.
The recall mostly concerns the Kona EV, Hyundai’s biggest-selling electric car which was first recalled late last year for a sotware upgrade ater a spate of fires. One of the recalled Kona EVS caught fire in January, however, and South Korean authorities launched a probe into whether the first recall had been adequate.
LG Energy Solution, a division of LG Chem, which manufactures the bateries, was quick to deflect criticism.
It said in a statement that Hyundai misapplied LG’S suggestions for fast-charging logic in the batery management system, adding the batery cell should not be seen as the direct cause of the fire risks.
South Korea’s transport ministry said in a statement that some defects had been found in some batery cells produced at LG Energy’s China factory. Hyundai did not comment on the cause of the fires.
Hyundai shares tumbled 3.9% while those for LG Chem closed down 2.8% in line with the broader market.
Analysts said they had been told by Hyundai that an agreement on how to split the costs may be worked out next week. Even so, they thought it might take longer given that reputational stakes were high and the two firms appeared to be at odds over the cause of the fires.
Hyundai declined to comment on LG Energy’s statement or provide details on when it will work out costs, saying only it will first wait for the results of the transport ministry’s probe.
The recall applies to nearly 76,000 Kona EVS built between 2018 and 2020, including about 25,000 sold in South Korea. Some Ioniq EV models and Elec City buses are also included in the recall.
The estimated 1 trillion won ($900 million) in cost includes 38.9 billion won that was spent on the first recall.