Bank of Korea holds interest rates steady as debt soars

[SEOUL] South Korea's central bank held its key interest rate unchanged for a fourth month after policy makers highlighted risks from mounting household debt.

The Bank of Korea left the seven-day repurchase rate at a record-low 1.25 per cent Thursday, a decision that was forecast by all but one of 18 economists surveyed by Bloomberg. In a statement, the central bank said its policy was aimed at ensuring an ongoing economic recovery and approaching its 2 per cent inflation target in the medium term.

It said domestic demand continued to improve and the economy to grow modestly. The BOK cited a high degree of uncertainty about future growth. It said it would closely monitor household debt as well as the progress of corporate restructuring and changes to global monetary policies.

BOK Governor Lee Ju-yeol is scheduled to hold a briefing at 2pm to explain why inflation has lagged the target.

Both Mr Lee and Finance Minister Yoo Il-ho have said economic growth so far this year has been within expectations.

Household debt jumped 11 per cent as of end-June from a year earlier to 1,257.3 trillion won (S$1.5 trillion), an all-time high. In parliament last week, lawmakers criticised the central bank, saying it had caused the debt binge by cutting borrowing costs too much.

Consumer prices rose 1.2 per cent in September from a year earlier, the fastest pace since February.

Mr Lee told reporters in Washington last week that current monetary policy was supportive of the economy, comments which in the past signalled that the central bank saw little need for near-term action. Mr Lee also called for caution due to financial risks and household debt.

Some economists expect additional easing in 2017 as economic headwinds strengthen, citing a potential Federal Reserve rate increase, restructuring by South Korean companies, and an anti-graft law that is expected to hit retailers and food producers.

Exports slumped last month after rebounding in August.

The BOK forecast 2.7 per cent and 2.9 per cent economic growth for 2016 and 2017, respectively, at the July outlook revision. It projected 1.1 per cent and 1.9 per cent for consumer price gains for the same periods.

The central bank is unlikely to cut rates anytime soon, according to Krystal Tan, Asia economist with Capital Economics.

"The most recent hard economic data have been disappointing, but the weakness has been mainly driven by temporary factors," Ms Tan wrote in a note following the BOK's decision. "Ongoing problems at Samsung as well as a strike by automobile workers led to a slump in shipments of electronic items and vehicles in September, dragging down exports last month. The BoK was never going to cut interest rates because of such one-off factors."

The yield on South Korea's three-year government bonds fell three basis points on Thursday to 1.32 per cent as of 11:05am in Seoul, Korea Exchange prices show.

The won weakened 0.2 per cent to 1,125.35 per US dollar.

BLOOMBERG