BoK holds rates but leaves door open for Nov hike

SEOUL: South Korea’s central bank kept its benchmark rate unchanged yesterday but flagged concerns about mounting household debt and financial stability, boosting expectations that it could raise rates as soon as next month.

While the Bank of Korea downgraded its gross domestic product growth forecasts for this year amid growing risks to global trade, its governor said the revised outlook still reflected the country’s “potential growth rate”.

The central bank kept its benchmark seven-day repurchase rate at 1.50%, as expected by 14 of 21 economists in a poll.

However, two of the bank’s seven board members voted against the decision to hold rates, BoK governor Lee Juyeol said at a press conference after the decision yesterday, an indication it may be moving towards a change in policy.

Governor Lee flagged worries about rising household debt and said “it’s time to focus on financial imbalances if economic recovery is stable and inflation is reaching the target level.”

Board members Lee Il-houng and Koh Seung-beom dissented in a 5-2 vote to keep the benchmark unchanged.

In the past, dissenting votes at policy meetings have portended subsequent changes in the rate. In 2017, Lee Il-houng voted against the hold in October before the board raised rates the following month, the first tightening in more than six years.

“(Lee’s press conference) was more hawkish than markets had expected. He said many times that its time to focus on financial stability now that growth rate is nearing the nation’s potential level, and inflation is reaching the target level,” said Park Sung-woo, a fixed-income analyst at Heungkuk Securities Co Ltd. “A hike in November is almost a done deal.”

South Korea’s policymakers have voiced concerns about a debt-binge in the private sector. Household debt was about 95% of GDP in the first quarter of this year, data from the Bank for International Settlement show, far above the average of 60.8% for the Group of 20 nations.

Rising US interest rates have also created concern among policymakers and investors about the growing gap between benchmark rates in South Korea and the US and the potential for capital flight.

While headline inflation is still below the bank’s target of 2%, September consumer inflation inched up to 1.9% in annual terms, removing a potential hurdle for further policy tightening.