Seoul

THE Bank of Korea raised its growth forecasts and kept interest rates on hold as it assesses the impact of a resurgence of the coronavirus at home and abroad on the economy's recovery path.

The BOK maintained its seven-day repurchase rate at 0.5 per cent on Thursday, a decision predicted by all 19 analysts surveyed by Bloomberg. The central bank sees the economy contracting 1.1 per cent this year and growing 3 per cent next year, both better than it expected in August.

The rate hold comes as South Korea's recovery faces increasing headwinds. Social distancing rules have been tightened as daily infections surged, exceeding 500 on Thursday.

Worsening outbreaks in major economies, along with a strong won, also threaten to undermine a rebound in Korean exports.

"Even considering the latest virus wave, the BOK likely sees the trajectory of recovery since May intact," said An Young-jin, an economist at SK Securities. "But the recovery is inevitably going to slow in the short term."

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South Korea was seeing signs of green shoots before the latest virus wave, with stronger exports hauling the economy out of a pandemic-triggered recession last quarter. Confidence among consumers and businesses was also improving, while industrial output started to rise above year-earlier levels.

The BOK likely weighed the potential boost expected from vaccines against the economic toll from the latest virus wave when upgrading its outlook.

The central bank has reduced its benchmark rate by 75 basis points this year to blunt the impact of the pandemic, in addition to providing liquidity and purchasing bonds to stabilise markets.

BOK watchers will now be keen to see whether any member voted against the hold decision and to gauge governor Lee Ju-yeol's readiness to turn to unconventional steps.

Mr Lee has so far offered few signs that the bank is close to full-scale quantitative easing while maintaining there's still room for another cut.

"The Bank of Korea is likely at the end of its easing cycle," said Justin Jimenez, and economist for Bloomberg Economics.

"Though the near-term recovery is facing headwinds from a resurgence of the virus at home and abroad, growing prospects of a 2021 rebound reduce the need for additional monetary stimulus," he added. BLOOMBERG