Bank of Korea Holds Key Rate Steady as Household Debt Rises

(Bloomberg) -- The Bank of Korea held its key interest rate unchanged for a third month, citing rising household debt and uncertainty over the Federal Reserve’s coming rate decision.

The BOK 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.

BOK 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 BOK 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 Friday’s meeting that the BOK would want to see the results of central bank decisions in the U.S. 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. “BOK will maintain an accommodative stance as the economic effects of the anti-corruption law and Hanjin Shipping issue have yet to play out.”

The BOK’s decision came about half an hour after news of a shallow earthquake near North Korea’s nuclear site. South Korean President Park Geun Hye later said North Korea conducted a nuclear test, in comments posted on the presidential office website.

South Korea’s won weakened 0.8 percent on Friday to 1,100.90 per dollar as of 1:37 p.m.

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.

Growth Challenges

Lee said the rise in household debt, which hit an all-time high of 1,257.3 trillion won ($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 in Seoul 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 last week, is expected to add to strains on the job market and slow overseas shipments.

In statements following its policy decision, the BOK said domestic demand has continued to improve, while sentiment has brightened a bit. The central bank said it will closely monitor household debt, changes in major countries’ monetary policies, and progress of corporate restructuring at home.

Economic data improved slightly in recent months. Exports in August rose for the first time in more than a year and a half. Gross domestic product growth for the second quarter was revised upward to 0.8 percent.

Yet consumer prices rose only 0.4 percent in August, far below the central bank’s 2 percent target and the lowest level in more than a year, mainly due to government’s temporary reduction of electricity bills.
Some expect the BOK to cut its key rate further in coming months. Of 24 analysts surveyed by Bloomberg on Sept. 2-7, 13 projected a cut to 1 percent by the end of the year. The rest forecast no change.