Why Bank of Korea didn’t pull the rate-hike trigger

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 0332GMT from 109.29 just before 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. Lee said the Bank of Korea’s 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.

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. —