SEOUL: The Bank of Korea yesterday held its key interest rate unchanged for a third month, citing rising household debt and uncertainty over the US Federal Reserve’s coming interest rate decision. The central bank left the seven-day repurchase rate at a record-low 1.25 percent, a decision that was projected by all but one of 32 economists in a Bloomberg survey.
Bank of Korea Governor Lee Ju-yeol said economic growth remains in line with the central bank’s latest projection, although he sees some downside risk to its inflation forecast. The central bank in July cut its growth forecast for this year to 2.7 percent and its inflation projection to 1.1 percent. Analysts had said prior to yesterday’s meeting that the Bank of Korea would want to see the results of central bank decisions in the US and Japan later this month before taking action.
“Lee didn’t give signals for an imminent cut and I now postpone the rate-cut call until after October,” said Yoon Yeo-sam, a fixed-income analyst for Mirae Asset Daewoo Securities in Seoul. The central bank “will maintain an accommodative stance as the economic effects of the anti-corruption law and Hanjin Shipping issue have yet to play out,” Yoon said.
Lee said the central bank is closely monitoring rising volatility in currency markets caused by changing expectations of a Fed rate increase. He said that while the markets should determine exchange rates, authorities can smooth volatility. He said the rise in household debt, which hit an all-time high of 1,257.3 trillion won (US$1.15 trillion) at the end of June, would likely slow due to government policies.
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 this week. Other 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 in the US last week, is expected to add to strains on the job market and slow overseas shipments. In statements following its policy decision, the central bank said domestic demand has continued to improve, while sentiment has brightened a bit. It said it would closely monitor household debt, changes in major nations’ monetary policies and progress of corporate restructuring at home.
Economic data improved slightly last month. Exports rose for the first time in more than a year and a half. GDP growth for the second quarter was revised upward to 0.8 percent. Yet consumer prices rose only 0.4 percent last month, far below the central bank’s 2 percent target and the lowest level in more than a year, mainly due to the government temporarily cutting electricity bills.
