BOK to maintain tight money approach over inflation uncertainties

Economy

Published: 14 Sep. 2023, 17:27 Updated: 15 Sep. 2023, 13:22

BOK to maintain tight money approach over inflation uncertainties

Lee Sang-hyeong, Deputy Governor at Bank of Korea, center, speaks at a press conference held at the central bank’s office in central Seoul on Thursday. [BOK]

The Bank of Korea (BOK) will maintain restrictive monetary policy for a considerable time amid uncertainties that may accelerate inflation, including a rise in global oil prices and volatility in the won-dollar exchange rate, said the central bank in a report on Thursday.

The BOK’s Monetary Policy Board will “evaluate the need for an additional policy rate increase” while operating a restrictive monetary policy that is centered on stabilizing inflation, it said.

The bank will take into consideration the downside risks of growth, ripple effects of the key rate increase, changes in the monetary policy of key countries and the growth of household debt in operation of the monetary policy.

The bank’s board has kept the policy rate steady at 3.50 percent since January. The rate differential with the United States has been a record high at 2 percentage points.

Korea’s consumer prices rose 3.4 percent in August, up from 2.3 percent in July.

“Whether consumer price growth will fall to the target inflation of 2 percent and the timing of when that happens remain considerably uncertain,” the BOK added.

The bank projects consumer prices to hover around 3 percent by the year-end as the base effects of a rise in global oil prices last year wane.

Demand-pull inflation, triggered by a recent resumption of Chinese tourists to Korea, uncertainties in a rise in public utility costs and volatility in oil prices and the won-dollar exchange rate are some of the factors that could drive up inflation or inflation expectations, the bank said.

The West Texas Intermediate crude futures rose to around $89 on Thursday compared to around $69 in June.

The central bank also raised concerns about the speed of household debt growth, driven by a recovery in housing transactions.

It added there should be “coordinated efforts” by financial authorities to contain household debt.

Increased housing transactions starting at the beginning of the year, an expected rise in housing supply in the second half of the year and a demand for loans to return deposits to tenants are expected to drive up household debt, according to the report.

Household debt extended by banks soared at the fastest pace in 25 months in August, rising by 5.9 trillion won ($4.46 billion) from a month earlier to 1,075 trillion won.

“The chance of a soft landing of the property market has waned” and “the growth of household debt has grown larger than anticipated,” said Lee Sang-hyeong, Deputy Governor at Bank of Korea, during a press conference held at the BOK office in central Seoul on Thursday.

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