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(LEAD) BOK freezes key rate, hints at rate hike amid rising inflation

Finance 11:07 October 12, 2021

(ATTN: UPDATES with more details in paras 5-8, 17, 20; CHANGES headline)
By Kim Soo-yeon

SEOUL, Oct. 12 (Yonhap) -- South Korea's central bank on Tuesday froze the policy rate as it assessed the impact of its rate hike in August, but it hinted at an upcoming additional increase amid rising inflation and growing household debt.

As widely expected, the monetary policy board of the Bank of Korea (BOK) stood pat on the benchmark seven-day repo rate, dubbed the base rate, at 0.75 percent.

In August, the BOK raised the key rate by a quarter percentage point from a record low of 0.5 percent, marking the first rate hike since November 2018.

It marked the end of 15 months of record low interest rates as the South Korean economy is recovering from the COVID-19 pandemic. The BOK slashed the base rate by a combined 0.75 percentage point between March and May 2020 to prop up the pandemic-hit economy.

This file photo, taken Oct. 1, 2021, shows stacks of containers at a port in South Korea's southeastern city of Busan. (Yonhap)

The BOK policy board said it will gauge the timing of a further rate hike while assessing virus situations, the pace of the economic recovery and inflation.

The BOK "will appropriately adjust the degree of monetary policy accommodation as the Korean economy is expected to continue its sound growth and inflation to run above 2 percent for some time, despite ongoing uncertainties over the virus," the central bank said in a statement.

Experts said the BOK is likely to raise the policy rate in November as the bank seeks the orderly adjustment of the accommodative monetary policy stance.

BOK Gov. Lee Ju-yeol said in August that the central bank took the "first step" toward easing a buildup of financial imbalances, signaling further rate hikes later this year or early next year.

The rate freeze came as the economic recovery momentum slowed amid the latest spike in COVID-19 cases.

Exports remain solid, led by strong demand for chips and autos, but uncertainty for the recovery of private spending heightened as the number of daily virus infections has remained above 1,000 for more than three months.

Exports, which account for half of the economy, grew 16.7 percent on-year in September, extending their gains to the 11th straight month.

The BOK kept its 2021 growth forecast for Korea at 4 percent despite the resurgence in COVID-19 cases as it said the surge of infections is not likely to significantly dent the economic recovery.

The BOK has taken close tabs on a build-up in inflationary pressure and the snowballing household debt, major reasons for its rate increase in August.

South Korea's consumer prices grew 2.5 percent on-year in September, compared with a 2.6 percent on-year gain the previous month, according to government data.

The country's consumer inflation rose more than 2 percent for the sixth straight month in September due largely to high prices of farm and oil products.

The BOK raised this year's inflation projection to 2.1 percent from its earlier forecast of 1.8 percent. The central bank aims to keep annual inflation at 2 percent over the medium term.

The BOK board said consumer prices are expected to run at the mid-2 percent level for a while, and core inflation, which excludes volatile food and oil prices, is forecast to rise to the upper-1 percent range.

The growth of household debt has shown no signs of letting up as more people have taken out loans to buy homes in anticipation of higher prices despite a series of government restrictions. Demand for unsecured loans also remains high amid a boom in stock investment.

Household credit reached a record high of 1,805.9 trillion won (US$1.51 trillion) as of end-June, up 41.2 trillion won from three months earlier, according to central bank data.

The financial regulator plans to soon unveil additional measures to curb the growth of household debt.

This file photo, taken Oct. 3, 2021, shows the dairy aisle at a discount store in Seoul. (Yonhap)

sooyeon@yna.co.kr
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