Central bank holds rate at 1.25%

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Central bank holds rate at 1.25%


The Bank of Korea held its key interest rate on Thursday, citing uncertainties in the financial market from North Korea’s bellicose saber-rattling and moderate recovery in the domestic economy.

The central bank’s monetary committee froze the rate at a record-low 1.25 percent for a 14th straight month, in line with market expectations.

The bank’s governor, Lee Ju-yeol, pointed to positive factors in the domestic economy and risk factors from abroad for keeping the rate unchanged.

“Korea has maintained steady economic recovery, though investment has slowed,” he said. “Exports have shown significant growth, and domestic consumption has improved.”

However, the bank has noticed high fluctuation in the financial market, especially as investors react to provocations from North Korea.

“Stock prices, long-term interest rates and foreign exchange rates have experienced high volatility because of intensified geopolitical risk,” Lee said.

Before tensions escalated between North Korea and the United States last month, market analysts believed the Bank of Korea would tiptoe toward tightening, given sound evidence of economic recovery, especially in exports.

In June, Lee sent out bold signals of an impending hike, saying, “Should it become more obvious that economic conditions will continue to improve, we may need to adjust the degree of monetary easing.”

Some analysts believe his latest comments on Thursday still hint at a possible rate increase, though the timing remains uncertain.

“The governor mentioned that economic stability could be hurt if the trend of monetary easing lasts for a prolonged period, especially considering the mounting amount of debt,” said Lee Mi-seon, an analyst at Hana Financial Investment.

“He also said that the Bank of Korea has already completed scenario studies on the impact of a rate hike for debt holders. This indicates that an interest rate increase is already on the table and all that remains is the timing.”

Korea’s household debt neared 1,400 trillion won ($1.2 trillion) in the second quarter, according to the Bank of Korea, at 1,388.3 trillion won, an increase of 29.2 trillion won from the previous quarter.

Although it was a smaller increase than the 22.9 trillion won jump seen during the second quarter of 2016, it was considerably bigger than the 16.6 trillion won rise during the first quarter of this year.

Some analysts believe that the central bank may choose to raise rates toward the end of this year or early next year to dissuade people from borrowing more money.

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