Base Rate Raised but... "Korean Economy Still Doing Fine"

COVID-19 Resurgence, Strong Consumer Sentiment Despite Enhanced Social Distancing
Steady Growth in Private Consumption Expected in Second Half
Recovery Possible with Rising Vaccination Rates

On the morning of the 26th, Lee Ju-yeol, Governor of the Bank of Korea, presided over the Financial Monetary Policy Committee's plenary meeting held at the Bank of Korea in Jung-gu, Seoul, and struck the gavel.

[Asia Economy Reporter Minwoo Lee] Despite the Bank of Korea raising the base interest rate, there is an analysis that South Korea's economy can continue to grow. This is based on the assessment that the impact of the COVID-19 resurgence on the economy is less severe than expected and that there is still room for growth in the private consumption growth rate.

On the 28th, Eugene Investment & Securities forecasted that since the vaccination rate is increasing, even if a new variant virus spreads, the impact on the economy will not be significant, and thus the recovery trend of private consumption is expected to improve going forward. They particularly predicted that in the fourth quarter, there is room for an upward revision beyond the Bank of Korea's forecast.

Earlier, the Bank of Korea's Monetary Policy Committee raised the base interest rate from 0.50% to 0.75%. This was because, despite the continued spread of COVID-19, the economy was expected to recover due to expanded vaccination and strong exports. The Bank also ended the scenario-based economic forecasts according to COVID-19 and vaccination developments, which had been announced since the COVID-19 outbreak, and switched to a single forecast. The economic growth rate forecasts for this year and next year were maintained at 4.0% and 3.0%, respectively, the same levels as in May.

However, the Bank lowered the private consumption growth rate for the second half of the year by 0.7 percentage points to 3.3%. The forecast for the first half of next year was also lowered by 1.4 percentage points to 3.3%. This was because the recovery trend in private consumption was expected to slow in the third quarter due to the resurgence of COVID-19 and strengthened social distancing measures.

However, Eugene Investment & Securities expects the private consumption growth rate in the second half to be 3.5% and anticipates that private consumption will steadily grow even in the fourth quarter. They foresee gradual improvement due to expanded vaccination and the government's supplementary budget execution.

Economist Yeonjin Kim of Eugene Investment & Securities explained, "Despite nearly two months of strengthened social distancing, Google's retail and entertainment mobility indices showed little change from last month through the end of this month," adding, "The consumer sentiment index has exceeded the long-term average of 100 for six consecutive months, and after a 7.1-point drop in July, it only slightly decreased by 0.1 points this month, indicating that while consumption is suppressed, there is sufficient potential for recovery."

Economist Kim further stated, "If the current vaccination pace continues, the rate of people receiving at least one vaccine dose will reach 70% by next month, and the full vaccination rate will achieve 70% by the end of October," adding, "Since the government is considering transitioning the quarantine policy to 'with COVID' around late September to early October, economic activity restrictions may be somewhat eased, which could improve the recovery trend of private consumption."

This content was produced with the assistance of AI translation services.