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Bank of Korea holds interest rate steady as household debt rises

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The Bank of Korea held its key interest rate unchanged for a third month as the economy showed signs of improvement and household debt hit a record high.

[SEOUL] The Bank of Korea held its key interest rate unchanged for a third month as the economy showed signs of improvement and household debt hit a record high.

The BOK left the seven-day repurchase rate at a record-low 1.25 per cent on Friday, a decision that was projected by all but one of 32 economists in a Bloomberg survey.

Analysts said the BOK would want to see the results of central bank meetings in the US and Japan later this month before taking action.

"There is no urgency for the BOK to cut rates at the moment," Ma Tieying, a Singapore-based economist for DBS Group Holdings, said before the decision.

"So far the pace of growth slowdown is within the BOK's expectations."

South Korea's economy grew 2.6 per cent in 2015, the slowest expansion since 2012. The BOK in July cut its growth forecast for this year to 2.7 per cent.

Economic data improved slightly in recent months. Exports in August rose for the first time in more than a year and a half. Gross domestic product growth for the second quarter was revised upward to 0.8 per cent.

Yet consumer prices rose only 0.4 per cent in August, far below the central bank's 2 per cent target and the lowest level in more than a year. The decline last month doesn't require a policy response from the BOK because it was largely driven by the government's temporary discount on electricity bills, DBS's Ma said.

Record Debt

South Korea's household debt hit an all-time high of 1,257.3 trillion won (S$1.55 trillion) at the end of June, despite stricter loan screening by banks starting earlier this year.

The debt is not a short-term threat to the economy but can pose a risk over the longer term if it limits households' capacity to spend, Kim Eng Tan, senior director for sovereign ratings at Standard & Poor's, said in Seoul this week.

Several BOK board members noted at the Aug 11 policy meeting that rising household debt posed financial risks, minutes from the meeting showed. The ratio of household debt to disposable income rose to about 146 per cent at end-March 2016, BOK said in a report submitted to parliament.

Challenges facing South Korea's economy include corporate restructuring and an anti-corruption law scheduled to take effect later this month. The Korea Economic Research Institute estimated that the law could cost the food, golf and retail industries about 11.6 trillion won annually.

The collapse of Hanjin Shipping Co, which filed for bankruptcy protection last week, is expected to add to strains on the job market and slow overseas shipments.

Expectations remain high that the BOK will cut rates further in coming months. Of 24 analysts surveyed by Bloomberg on Sept 2-7, 13 projected a cut to one per cent by the end of the year. The rest forecast no change.

South Korea's won appreciated 1.3 per cent in the past month, the best performance in Asia, to close at 1,092.55 per US dollar on Thursday. The yield on three-year government bonds was 1.29 per cent as of market close in Seoul on Thursday, Korea Exchange prices show.

BLOOMBERG