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South Korea house prices cannot be sole cause to hike interest rates

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House prices are only one input to South Korean monetary policy decisions, policymaking sources said on Tuesday, after new government measures to curtail house prices sparked market speculation on interest rate rises.

[SEOUL] House prices are only one input to South Korean monetary policy decisions, policymaking sources said on Tuesday, after new government measures to curtail house prices sparked market speculation on interest rate rises.

The Bank of Korea's base rate currently is a record-low 1.25 per cent, and most analysts see the bank raising rates sometime next year, as any hike sooner could put already-high households' debt burden at risk, the officials said.

The policy rate has been kept unchanged since it was lowered by 25 basis points in June 2016.

"It's not favourable to change interest rates just by looking at house prices when there are so many variables in the economy," said a senior official knowledgeable about interest rate changes.

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"Even the International Monetary Fund advises asset market issues be dealt with through micro-economic measures due to global uncertainties," he said.

One official at the presidential Blue House said if interest rates are raised to stabilise property prices, "the household debt issue could become serious".

At the end of March, total household debt was equivalent to 83 per cent of the country's gross domestic product, according to the central bank.

The Bank of Korea is independent from the government and Blue House but it still makes efforts to harmonise monetary policy changes with the government, for maximum effect.

The government last week announced its most stringent measures to date on property speculation and borrowing.

It raised capital gains taxes on owners of multiple homes and imposed fresh mortgage curbs to rein in speculators who policymakers blame for stoking a housing bubble in main regions across South Korea.

Another senior administrative official said if a sharp rise in housing prices affects inflation, that could influence rate policy, but before then, interest rates cannot be used to resolve the housing price issue alone.

REUTERS

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