The Bank of Korea held its policy rate steady for a fourth-straight meeting and pledged to retain a restrictive policy stance for a prolonged period as it seeks to put a lid on consumer inflation.
The central bank kept its seven-day repurchase rate at 3.5% on Thursday as predicted by all 15 economists surveyed by Bloomberg News. The BOK pledged in its statement to keep a restrictive policy stance for a “considerable time with an emphasis on ensuring price stability.”
In his post-meeting press conference, Governor Rhee Chang-yong said the decision was unanimous, with all six members on his board remaining open to the possibility of ultimately lifting the rate to 3.75%, as was the case in May.
The BOK’s holding pattern of recent months reflects its need to rein in price growth without putting too much pressure on a sputtering economy or exacerbating credit strains.
The headline inflation rate eased for a fifth month in June, but gains in the core price gauge have proven stickier than expected. Rhee said that while inflation will slow in July, it’s expected to accelerate again to the 3% level and stay there through year-end.
“The rate hold was expected because inflation has eased quite a lot and concerns over financial imbalances have risen,” said Woo Hye-young, fixed-analyst analyst at Ebest Investment & Securities Co. The central bank kept its hawkish bias because a softening of that stance might “reduce the scope for the BOK to respond to any potential Fed hikes going forward,” she said.
The gap between South Korean and US interest rates stands at the widest on record. The slowdown in US consumer inflation in June took some of the pressure off the Federal Reserve, but it’s still expected to raise interest rates one more time later this month.
What Bloomberg Economics Says...
“A tight jobs market and recent increases in household borrowing in the face of higher rates add to the case for the BOK to keep a hawkish stance for the time being.”
- Hyosung Kwon, economist
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Rhee said a number of officials expressed concern about rising household debt levels.
“The household debt-to-GDP ratio has always been on the rise for the past 70 years except for times of crisis,” Rhee said. If the ratio continues to rise, “it will become a big source of concern, and thus it’s clear we can’t let it keep growing.”
Bank loans to households rose to a record-high at the end of June, adding to concerns over financial imbalances. Rhee said policy rates alone can’t resolve challenges pertaining to household debt.
Rising default rates at MG Community Credit Cooperatives and uncertainties linked to the nation’s housing market are also a concern. Rhee said issues related to credit cooperatives have moderated in recent days. He attributed a correction in house prices to a history of high leverage.
The BOK was among the first central banks globally to pause interest rate hikes when it stood pat in February.
--With assistance from Heejin Kim.
(Adds Rhee’s comments from press briefing)
