South Korea's central bank is determined to keep a lid on interest rates for now despite optimism about post-pandemic growth in the country and concerns over inflation.
The Bank of Korea (BoK) kept its seven-day repurchase rate unchanged at 0.5% on Thursday amid worries that rising Covid case numbers could scupper its economic recovery.
The central bank has kept rates at that level since May last year, after it cut them by 75 basis points to help the economy cope with the fallout of the pandemic.
And while the bank said strong exports and a rise in consumption will continue to lift the economy, it said uncertainties remained and it would continue to monitor the coronavirus outbreak.
"Looking at how the global economy and domestic activities fared in the first quarter... growth of mid-3% is very possible [in 2021],” Bank of Korea Governor Lee Ju-yeol said.
He said he expects the economy to expand between 3% and 4% this year, compared with a previous forecast for 3% growth in 2021.
"But it's a concern that the resurgence of the coronavirus has hardly subsided, and that the inoculation rate remains at a 2% range."
South Korea has reported around 700 new coronavirus cases per day this week, a level not seen since January.
But analysts expect surging home prices and faster inflation to push policymakers to start raising interest rates in 2022.
South Korea's consumer price inflation hit a 14-month high of 1.5% in March and the bank was confident inflation will run at around 2% before declining. Policymakers are also keeping an eye on rising property prices amid concerns they could swell an already hefty household debt pile.
“[The BoK] could turn on the blinker by the end of the fourth quarter and possibly raise interest rates in the first quarter of next year," said Ahn Jae-kyun, fixed income analyst at Korea Investment & Securities.
"How the virus spread would play out is still hard to predict, but it seems the market is focusing on the brighter economic assessment."
- Reporting by Reuters