You are here
Bank of Korea stands pat as household debt, North Korea eyed
[SEOUL] South Korea's central bank kept its key interest rate unchanged at a record low on Thursday, as expected, saying there was still "a considerable amount of uncertainty" despite affirming its confidence in an economic recovery.
Governor Lee Ju-Yeol declined at a news conference after the decision was announced to give any guidance on the near-term direction of monetary policy, but his references to South Korea's heavy household debt suggested the central bank was leaning towards tightening.
The September contract on three-year treasury bond futures dropped by six ticks to 109.23 at 0332 GMT from 109.29 just before Mr Lee's news conference started. The won and stocks showed a muted reaction.
"The governor did not say so outright but his comments as a whole gave an impression that the central bank may raise interest rates if needed to contain household debt," said Kim Jina, fixed income analyst at IBK Securities.
Mr Lee said the Bank of Korea's (BOK) seven-member monetary policy committee voted unanimously to keep the base rate unchanged at a record-low 1.25 per cent, where it has been since June last year.
All 19 analysts in a Reuters poll forecast the central bank would hold rates this week, but most see the bank tightening policy sometime next year.
Mr Lee held back from making new comments on the household debt problem but he did acknowledge its scale. South Korea's household debt stands at more than 90 per cent of gross domestic product and poses a potentially serious risk to the economy.
He said the central bank needed more time to assess its policy stance and to study the effects of a series of economic and financial policy packages introduced by the new government in the past few weeks.
Heightened tensions over North Korea's repeated missile firings are another big factor that could hurt the economy, Lee said, but added it would be premature to quantify their impact.
The government of President Moon Jae-In has pledged to keep the housing market from overheating and to manage household debt. It is due to unveil fresh steps aimed at containing growth in household borrowing next month.
Those measures would follow laws announced early this month to raise capital gains taxes on owners of multiple homes and impose fresh mortgage curbs to rein in speculators. They are the most stringent on record and demonstrate the government's deep concerns over rampant household debt.
The central bank will also be watching closely for the effects of an 11 trillion won (S$13.30 billion) supplementary budget that was approved by parliament in late July. The budget will mainly focus on creating social service jobs.
The BOK has kept its policy rate unchanged since June 2016 and is widely expected to hike rates sometime next year as the economy improves.
There are, however, lingering doubts that the recovery is unquestionably rock-solid, and policymakers have expressed concerns that economic gains may be too narrowly focused in some sectors and not as broadly based as they would like.