BOK keeps base rate steady but warns of restrictive policy

Bank of Korea Gov. Rhee Chang-yong speaks at a press conference held at the bank headquarters in central Seoul on Thursday following the Monetary Policy Board meeting. [BANK OF KOREA]

The Bank of Korea (BOK) kept its policy rate unchanged Thursday for the fourth consecutive time, holding it at 3.5 percent as it battles growing household debt and lingering financial risks.

It was a unanimous decision by the Monetary Policy Board, although the central bank warned of a future potential rate hike by a quarter percentage point, BOK Gov. Rhee Chang-yong said at a post-meeting press conference held at the bank’s headquarters in central Seoul.

Rhee's six board members “believe it would be appropriate to continuously tighten monetary policy for a considerable time,” given that it will take time before inflation falls back to the targeted 2 percent, he said.

Korea’s consumer inflation hit a 21-month low to grow 2.7 percent in June from a year earlier. But the central bank expects inflation to rise again in the coming months.

Rhee said the board members are concerned about growing household debt.

Household loans extended by banks hit a record high as of June, growing for a third consecutive month due to soaring demand for housing.

Korea’s household debt-to-GDP ratio is higher than 103 percent.

“Sophisticated policy measures are required” to manage household debt, Rhee said. But abrupt policy measures could cause major side effects as demonstrated by the recent project financing risks and house owners’ inability to pay back jeonse (lump-sum house rental deposits), he added.

The Korean Federation of Community Credit Cooperatives was hit by customer withdrawals this month following reports on a rise in non-performing loans related to its real estate projects. Rhee said issues related to the credit union have since stabilized.

Other uncertainties worrying BOK officials include potential rate increases by the Federal Reserve, which could affect the won-dollar foreign exchange rate.

Consumer prices in the United States fell for the 12th straight month to 3 percent in June. But the Fed sees more rate increases ahead, according to the minutes from its June meeting released on July 5.

The CME FedWatch Tool, which forecasts rates using Fed Fund futures contract prices, put a rate increase to range between 5.25 and 5.5 percent at more than 90 percent.

Federal Open Market Committee (FOMC) members unanimously kept the rate steady at a target range of 5 and 5.25 percent at the June meeting. The next two-day FOMC meeting is scheduled to start on July 25.

Hyundai Motor Securities “projects it would be difficult for the Bank of Korea to raise the policy rate,” analyst Oh Chang-sup said. “Capital outflow and the currency exchange rate remain favorable despite the record rate differential between Korea and the United States.”

Foreign investors’ holding of bonds in won hit a record high of 244.2 trillion won ($192.2 billion) on July 7.

“Inflation momentum continues to weaken due to a fall in overall prices, including for raw materials and marine transportation, causing deflation,” Oh said, adding inflation will fall to a 1 percent range next year.

BOK forecast a 3.5 percent inflation for this year in May.

The central bank's next Monetary Policy Board meeting is scheduled to take place on Aug. 24.

BY JIN MIN-JI [jin.minji@joongang.co.kr]