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(LEAD) BOK to comprehensively deal with possible U.S. rate hike

All Headlines 16:33 October 04, 2016

(ATTN: RECASTS throughout with comments by BOK chief; CHANGES headline)

SEOUL, Oct. 4 (Yonhap) -- The Bank of Korea will make a comprehensive response to a U.S. rate hike expected later this year to minimize its impact on the Korean economy, the central bank's governor said Tuesday.

BOK Gov. Lee Ju-yeol said in an annual parliamentary audit of the central bank that he shares the market consensus that the U.S. Federal Reserve could raise its interest rate one time within this year.

"If the Fed raises rates, the central bank will take into account the rate hike's impact both on the domestic and global financial markets and then come up with measures (to reduce any sharp volatility)," he said. Last month, the Fed has maintained its target range for the federal funds rate unchanged at 0.25 percent to 0.5 percent.

Lee said last month that South Korea's interest rates should be higher than those of the key currency country as it needs to take into account the danger of capital outflows as a small open economy, referring to U.S. interest rates.

In September, the BOK held the key rate unchanged after sending it to a record low of 1.25 percent in June to strengthen growth for Asia's fourth-largest economy.

Lee said he expects the country's consumer prices to rise an annual average of 1.0 percent this year, down 0.1 percentage point from the BOK's estimate in July. He also said the central bank will make public the results of its research within the first half of next year on how to deal with a low birth trend and an aging population. South Korea's low birth rate and aging population are feared to reduce the workforce and drive up welfare costs, undermining its growth potential. South Korea's total fertility rate, or the average number of babies that a woman is projected to have during her lifetime, reached 1.24 in 2015. It marked the second-lowest fertility rate in the Organization for Economic Cooperation and Development, a group of 34 mostly rich nations.

Lee also said the central bank will closely consult with the government in coping with rising household debt in South Korea, though he did not elaborate.

The country's household debt reached an all-time high of 1,257.3 trillion won (US$1.13 trillion) as of end-June due to record-low interest rates and strong demand for new apartments. It's one of the highest household debt levels in the world compared with income levels.

The ruling and opposition lawmakers at the parliamentary audit session pressed the central bank to come up with countermeasures against rising household debt, saying household debt could become a huge burden on the local economy.

Bank of Korea Gov. Lee Ju-yeol speaks during the National Assembly's audit of the central bank at the bank headquarters in Seoul on Oct. 4, 2016. (Yonhap)

Separately, the BOK remained cautious on a redenomination of the Korean won, citing increased economic uncertainties at home and abroad.

The BOK said it has carried out no task on a currency redenomination since 2004 when the government decided to put off discussions on the issue.

Finance Minister Yoo Il-ho said in June that the government has no plans for a redenomination, noting it could cause great confusion.

Redenomination refers to adjusting the nominal value of the Korean won. Currently, the won is higher than other currencies in terms of value. South Korea's highest denomination bill is 50,000-won, which is worth US$45.

The BOK said in-depth discussions by the government and a public consensus should be in place for a redenomination as it is a grave issue that can affect the economy.

"A cautious approach is needed for a redenomination due to heightened economic uncertainties at home and abroad," the BOK said in a report to Kim Jong-min, a lawmaker of the main opposition Minjoo Party, for an annual parliamentary audit of the BOK.

The central bank said a redenomination could offer public convenience in calculation and enhance the status of the Korean currency abroad.

Still, a redenomination can cause public inconvenience in the process of adjusting to new bills and a possible hike in consumer prices and spread psychological anxiety among economic players, the BOK said.

entropy@yna.co.kr
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