Bank of Korea’s Lee Warns Against Asset Rally Driven by Debt
Bank of Korea’s Lee Warns Against Asset Rally Driven by Debt
(Bloomberg) -- Bank of Korea’s Governor Lee Ju-yeol warned against excessive borrowing that has spurred a rally in the country’s stock and property markets, while pledging to continue support for a fragile economic recovery.
Speaking at a briefing after the board unanimously agreed to hold its key rate at 0.5%, Lee said recent gains in the Kospi stock index and housing prices have been rapid, especially when compared with the state of the real economy.
“Increasing investment based on excessive leverage can cause unbearable losses for investors when there’s a price correction, and I’m worried about that,” Lee said, while playing down the likelihood of any action to address financial concerns in the near future. “We’re always watching these matters closely.”
Government bonds and the local currency remained largely unchanged following the decision and Lee’s comments. The benchmark stock index fell for the first time in three days.
The remarks followed warnings by Lee at the start of the year that financial risks could start to rattle markets. A series of rate cuts and liquidity pumping last year have cushioned the pandemic’s economic fallout, but have also accelerated household debt growth and lifted property prices to a level that some see as a bubble.
Lee’s warning on rising asset prices “can be taken as somewhat hawkish,” said Lim Hyeyoun, an economist at KTB Investment & Securities Co. “Still, the economic situation tells us a change in policy would be too early, at least for this year and maybe even next year, too.”
The governor said the time hadn’t come for the bank to even consider changing its policy rate stance, citing the difficulties experienced by vulnerable groups as the pandemic continues and business restrictions remain in place.
Still, Lee suggested pandemic assistance should be provided more selectively, including any further cash handouts by the government. He said corporate support measures were not intended to help the debt-laden marginal companies continue in existence, but to ease firms’ temporary liquidity crunches.
The BOK stuck to its view that the economy will expand around 3% this year, led by exports and investment, but flagged that uncertainties are high. A jump in unemployment and the worst job losses since 1999 last month suggest the economy warrants continued support.
Recent data also point to the growing financial risks.
Korea’s household debt jumped 7% in the third quarter, the fastest pace in two years and taking the debt-to-income ratio to a record 171%. Home prices in Seoul were 11% higher in December than a year earlier, buoyed by cheaper loans, abundant liquidity, and a housing shortage. The Kospi stock index topped 3,000 for the first time ever this year.
What Bloomberg Economics Says ...
“Our baseline expectation is for the BOK to maintain an accommodative stance through next year to safeguard the recovery in the domestic economy. But should those financial risk concerns come to a head, the central bank may be compelled to raise rates sooner. “
-- Justin Jimenez, Asia economist
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Among risks that could rattle markets, Lee mentioned a potential change in other central banks’ monetary policies, geopolitical tensions, a delay in Covid vaccine deployment, and a worsening of the global pandemic.
Lee said an increase in government bond issuance could put upward pressure on bond yields, and reiterated the BOK’s pledge to stabilize markets as necessary. Despite expectations by some investors, the governor didn’t offer a concrete plan on future bond purchases.
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