Central bank holds interest rate

Korea’s central bank kept its benchmark interest rate unchanged at 1.25 percent in a unanimous decision on Friday, joining major central banks in the wait-and-see camp ahead of the U.S. Fed meeting on Sept. 21.

The Bank of Korea (BOK), led by Gov. Lee Ju-yeol, noted that underlying economic conditions including ballooning household debt and the Fed’s potential rate hike don’t currently warrant a change in policy.

“[BOK] factored in the rapid pace of household debt increase and the possibility of the U.S. Fed increasing its key rate as the Korean economy shows steady signs of growth,” Lee said.

Financial authorities unleashed a set of measures aimed at curbing debts, including regulations on group mortgage loans, but debt levels are far from retreating.

Korea’s household debt increased by 8.7 trillion won ($7.9 billion) in August, registering the highest August increase since the Bank of Korea began keeping records in 2008.

As for the overall state of the Korean economy, the central bank says that the economy is showing modest growth.

“Exports have increased slightly on the effects of transitory factors and domestic demand activities appear to have continued their improvements, while the sentiments of economic agents have improved somewhat,” the BOK said in a statement.

“On the employment front, as the number of persons employed has increased, the employment-to-population ratio rose and the unemployment rate fell in July compared to those in July of last year,” it said.

With the steady rate decision, the BOK could take time to assess the impact of the government’s supplementary budget that was passed by the National Assembly last week after months of delay. Lee also noted that the BOK will closely monitor Hanjin Shipping, the country’s largest shipping company that filed for court receivership.

“The impact [of Hanjin’s collapse] on the economy will be limited if the government measures properly take place.”

Market watchers anticipated a signal from the governor of an additional rate cut after June decision, but Lee remained vague.

Still, he noted that the Fed’s decision to raise its key rate would prompt the BOK to elevate the lower limit of the benchmark rate.

“Korea’s interest rate should remain lower than that of the country holding the key currency,” Lee said. “The rise in the U.S. interest rate could trigger capital outflow [from Korea] with the strengthened dollar, so that [the rate hike] could lead to the increase of the lower limit.”

Korea is not the only one taking a cautious stance. The European Central Bank left its key interest rate unchanged on Thursday, following the Bank of Canada’s stance.

Economists raised the possibility of a hike in September but some of them have dropped the view since the latest economic indicators in the U.S. remained weaker than expected.

But the consensus is that the Fed will raise the rate within this year.

After the BOK meeting, some analysts revised their forecast on whether the central bank will opt for another rate cut.

Hana Financial Investment expected the BOK to hold the 1.25 percent rate throughout this year, stepping back from its call for a rate cut in October.

“The increased possibility of the U.S. interest rate hike this year would hold back the BOK from taking a further cut,” said Lee Min-seon, a researcher at Hana Financial Investment.

“On top of that, there is growing concern for household debts.”

Still, Nomura Securities released a report on Friday projecting that the BOK would cut its key rate in October.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]