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South Korea central bank to keep easy stance but wary of household debt, Fed hike

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South Korea's central bank promised to keep its monetary policy easy in a report released on Tuesday, but stopped short of signalling additional interest rate cuts as it keeps wary of household debt levels and external risks.

[SEOUL] South Korea's central bank promised to keep its monetary policy easy in a report released on Tuesday, but stopped short of signalling additional interest rate cuts as it keeps wary of household debt levels and external risks. "We plan to keep our monetary policy accommodative as the ongoing recovery is steady and as inflation is expected to remain low," the Bank of Korea's twice-yearly report on monetary policy said.

At the same time, the central bank stressed it would act with other authorities to rein in household debt should that pose risks to financial stability, while closely monitoring external risks such as changes in the US Federal Reserve's policy and economic sluggishness in China.

The BOK has lowered interest rates four times between August 2014 and June, taking the base rate to a record low 1.50 per cent.

The central bank said the cuts in March and June had"effectively" influenced real borrowing rates by bringing them down. "Our market interest rates may rise after the Fed hikes interest rates, regardless of our monetary policy. However, they will probably rise at a limited pace as we plan to keep rates accommodative enough to support economic growth," said Yoon Myun-shik, a deputy governor at the Bank of Korea, at a briefing on Tuesday's report.

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The report added that South Korea does not face a high chance of capital flight en masse even if interest rates are hiked in the US.

Although South Korea saw outflows during the third quarter due to jitters sparked by China, stocks and bonds saw modest inflows in October, Mr Yoon said.

The BOK stated that its response mechanisms against sudden outflows have strengthened "considerably" compared to the past. South Korea's country's economic fundamentals are more stable than those of other emerging economies, it added, citing its massive foreign exchange reserves. "However, this does not mean that we are complacent," Mr Yoon said. "Rather, we are continuing efforts to keep our economy strong as weakness in other emerging economies after the Fed rate hike may become contagious." The BOK also said offshore interest in assets denominated in the Korean won has increased but added it will keep monitoring international financial markets in case of sudden changes.

REUTERS

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