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UPDATE 3-S.Korea c.bank holds rates, reassures markets on policy support

* BOK keeps base rate steady at 0.50%, as widely expected

* Governor Lee says plans to buy 5 trln won of T-bond intact

* Analysts say monetary policy likely to stay on hold for a while (Adds vice finance minister’s comments in the eighth paragraph)

SEOUL, Oct 14 (Reuters) - South Korea’s central bank kept its policy rate steady on Wednesday, noting housing prices continued to rise, but reiterated an accommodative monetary stance as it kept a downbeat outlook for the coronavirus-hit economy.

The Bank of Korea held the base rate at a historic low of 0.5%, as expected by all 34 economists in a Reuters poll.

The central bank said the pace of recovery had slowed due to the resurgence of COVID-19 and stuck to its forecast that the economy would see its biggest contraction in over two decades in 2020.

Governor Lee Ju-yeol also reiterated the central bank would purchase about 5 trillion won ($4.37 billion) worth of treasury bonds until the end of 2020 to soak up the record 167 trillion won debt sales planned for this year.

“We don’t have plans to increase the outright purchase of treasury bonds for now, but we will remain flexible on that depending on market situation,” Lee said in a press conference.

The decision to hold fire comes as Seoul’s median home prices have risen more than 50% in the past three years.

Lee said on Wednesday “household debt growth is increasing for a third straight quarter, an issue policymakers are concerned about.”

Separately, Kim Yong-beom, South Korea’s vice finance minister, said the government was ready to deploy additional measures to curb household debt. President Moon Jae-in has tightened mortgage rules since 2017 and introduced tax penalties to discourage debt binging and home buying.

Asia’s fourth largest economy plunged into recession in the second quarter, but ample monetary easing and 277 trillion won of fiscal stimulus has helped soften the blow from the coronavirus pandemic.

While recent manufacturing and jobs data have pointed to a tentative recovery, Lee said the economy was on track to meet the BOK’s forecast for a 1.3% contraction this year, which would be the biggest since the Asian financial crisis in 1998.

A rise in coronavirus cases saw South Korea impose restrictions on onsite dining and leisure facilities in August but these were eased this month even though small clusters of infections continue to emerge.

“Unless the third quarter growth worsens significantly, I don’t see another rate cut coming,” said Paik Yoon-min, fixed-income analyst at Kyobo Securities.

South Korean exports rose for the first time in seven months in September as major trading partners eased lockdowns but analysts worry the coronavirus resurgence in the United States and Europe could hurt export demand in coming months. ($1 = 1,143.0000 won) (Reporting by Cynthia Kim; Editing by Ana Nicolaci da Costa)

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