BOK’s Koh suggests no cut in rate

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BOK’s Koh suggests no cut in rate

Published: 03 Jul. 2019, 20:18

A central bank board member highlighted the importance of financial stability during a media event on Wednesday, taking a stance suggesting the maintenance of rates at current levels despite calls for a cut.

Koh Seung-beom, a member of the Bank of Korea monetary policy committee, argued that the heavy reliance on debts could derail economic growth.

Koh Seung-beom, Bank of Korea monetary policy committee member. [BANK OF KOREA]

“The excessive influx of external financing made available through the accumulated debts could translate into a financial crisis, whether the subject is an individual, a bank or the government,” Koh said, citing the analysis by Carmen Reinhart, a professor at Harvard Kennedy School.

To highlight the risks associated with soaring debt levels in Korea, the policymaker mentioned the International Monetary Fund’s (IMF) warning against a high debt-to-gross domestic product (GDP) ratio.

“[The IMF] sees that financial risks at banks increase when the debt-to-GDP ratio rises above 65 percent,” he said.

The country’s ratio of household debt to GDP came to 96 percent in 2018, according to data compiled by the Bank for International Settlements. The pace of household debt growth, however, has eased this year due primarily to government measures, including tougher loan screening.

Koh’s remarks dampened market expectations for signs of a possible rate cut.

His cautious stance on indebtedness indicates that the board member is currently inclined against lower interest rates, since the reduced base rate could drive more people to turn toward loans.

Koh said that he keeps tabs on different challenges facing the Korean economy, including sluggish exports and weak investment.

The benchmark interest rate has remained unchanged at 1.75 percent. The last time the bank adjusted the rate was in November, when it added 0.25 percentage points to the previous 1.5 percent.

In the May meeting, the highlight was a dissent from Cho Dong-chul, who voted to lower the rate.

Several economic institutes, including Hyundai Research Institute and the IMF, called for a rate cut given that the economy is beset by unfavorable domestic and external conditions, including sluggish exports, a tepid job market, weak investment, the trade dispute between the United States and China, and geopolitical and economic uncertainties related to Brexit and North Korea.

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