South Korea has exhibited a good track record of macro-policy management in recent years. Buffers have been built, with for example the Bank of Korea (BOK) being one of the first central banks in Asia to start a tightening cycle in 2017. In the wake of the Covid-19 crisis that started at the beginning of 2020, the BOK was swift to react, cutting the policy rate by 75bp in total to the record low level of 0.5% by May. At the July policy meeting, BOK policymakers unanimously decided to keep the policy rate unchanged. While continued asset purchases, lending schemes and liquidity injections are likely, we do not except any further changes in the policy rate for the remainder of the year. This is because policymakers aim to support the economy and also limit negative side effects (such as rising household debt and housing price).

On the fiscal side, there is leeway for stimulus: South Korea’s public finances are strong and government debt is low (c.40% of GDP in 2019) compared to other high-income economies. The fiscal balance is set to deteriorate as authorities have stepped up expansionary measures to counter the shock of Covid-19. Three supplementary budgets amounting to KRW59tn (3.0% of 2020 GDP) have been passed as of early July 2020. Stimulus measures aim to boost domestic demand (infrastructure spending, household cash transfers, etc.), support the labor market and financially assist SMEs and vulnerable industries. The stimuli should be enough to bring the South Korean economy back to a mild recovery path and we expect no further aggressive easing in 2020.