BOK cautious on rate policy amid uncertainties

Finance

Published: 27 Jul. 2023, 11:10

BOK cautious on rate policy amid uncertainties

U.S. Federal Reserve headquarters in Washington [YONHAP]

Korea will closely monitor the market, taking note of the possibility of further volatility in the financial markets here and abroad, the country's central bank said Thursday.

"The market expects [U.S.] monetary tightening policy to end following a slowdown in inflation ... but uncertainty over the currency policy will continue, having reaffirmed that the [U.S. Federal Reserve's] rate decision is data-dependent," Lee Seung-heon, senior deputy governor at the Bank of Korea (BOK), said in a meeting with BOK officials.

The Fed raised its benchmark lending rate by a quarter percentage point Wednesday, sending it to the highest level since 2001.

Fed Chair Jerome Powell suggested overnight that the central bank may hold or raise the rate in September depending on U.S. economic data.

The rise increases the key rate to a range between 5.25 percent and 5.5 percent, further widening the gap between the key rates of Korea and the United States to an all-time high of 1.75-2 percentage points.

Korea's central bank kept its benchmark rate frozen at 3.5 percent earlier this month.

Higher rates in the United States are feared to prompt money outflows from Korea, which may weaken the local currency against the dollar while putting upward pressure on inflation by making imports more expensive.

People shop at a discount store in central Seoul on July 13. [NEWS1]

At its next rate-setting meeting in August, the BOK will likely decide whether to follow suit to prevent possible headwinds, such as increasing household debt, or stand pat to spur the slow economic recovery.

Higher borrowing costs will likely strike a blow to Korean loaners as banks' household loans logged an on-month increase for the third consecutive month in June.

In June, household debt jumped 6.4 trillion won ($5.02 billion) from a month earlier, posting the biggest jump since September 2021, according to BOK data.

"When I attended a BOK meeting, I could see that the central bank's concerns over household debt are bigger than expected," Cho Young-moo, a senior researcher at LG Business Research, said. "But because it needs to consider other factors, such as the economy, the BOK will be in a deadlock of not being able to raise or cut its key rate for more than six months."

On Tuesday, the BOK said the country's real GDP — a key measure of economic growth — increased 0.6 percent on-quarter in the April-June period due to a positive net export achieved by a steeper fall in imports than exports.

But the estimated data showed that private consumption, government spending and investment all retracted, indicating a slow economic recovery.

BY SOHN DONG-JOO, YONHAP [sohn.dongjoo@joongang.co.kr]