You are here

South Korea central bank chief says easy monetary policy has limits in boosting demand

Bank of Korea (BOK) Governor Lee Ju-yeol bangs the gavel to open a monthly rate-setting meeting at the central bank's headquarters in Seoul, South Korea,on Aug 13, 2015. PHOTO: EPA

[SEOUL] South Korea's central bank governor on Thursday expressed scepticism over the lasting effects of easy monetary policy on demand, saying that structural reforms are crucial to foster sustainable economic growth. "Since the effects of accommodative monetary policy in boosting demand cannot last for a long time, structural reforms to enhance productivity in the financial and labor sectors are essential for sustainable growth," said Bank of Korea Governor Lee Ju-yeol in opening remarks at an international conference hosted by the central bank.

Mr Lee added central banks around the world should monitor economic and financial imbalances and other negative side effects that can result from accommodative monetary policy. "In Korea, for example, a series of policy rate cuts has been accompanied by rapid growth of household debt," he said. "So we are now closely looking at the risks in the financial system due to the build-up of household debt, as well as at the macroeconomic risks, such as the shrinking of consumption capacity." South Korea's central bank has lowered interest rates four times since last year to a record-low 1.50 per cent, with the last cut taking place in June.

Household debt has grown rapidly as South Koreans took advantage of low borrowing costs to buy homes, spurred on by a government campaign to boost real estate transactions. In a response to growing worries over mounting debt, South Korea unveiled a set of measures aimed at mitigating risks from household borrowing in July.

Due to growing household debt and global uncertainties stemming from the pending rate hike by the US Federal Reserver, most analysts now forecast the BOK will stand pat for the rest of 2015.