The need for further easing in interest rates has be reduced given the signs of recovery in the economy and prices, but the Korean central bank will maintain monetary policy loose to accommodate growth against uncertainties on the trade and security front, the Bank of Korea Governor Lee Ju-yeol said Thursday while holding the base rate steady for the ninth session.
The Bank of Korea (BOK) bound by slow-moving economy, snowballing household debt, and tightening in the U.S. stayed put on the policy rate at record-low of 1.25 percent, last cut in June 2016.
“There is less need for cut in rates than before given the growth pace in the economy and prices,” Lee told reporters after the third monetary policy meeting this year. The BOK from this year holds monetary meetings 10 times instead of monthly and skipped March.
The central bank on the same day also slightly revised up this year’s gross domestic product (GDP) to 2.6 percent from 2.5 percent last estimated in January upon revision in the fourth-quarter data and improvement in this year’s exports.
Data and sentiment has improved upon eased political instability after impeached President Park Geun-hye was removed from office and a snap presidential election is scheduled to be held in May, but geopolitical risks have added to uncertainties for the economy, he said.
Rumors of imminent North Korea nuclear and missile test this month and talk of preemptive or retaliatory strike by the United States have built war-like tensions on the Korean Peninsula.
The next stimuli against uncertainties at home and abroad should come from the fiscal reserves instead of the monetary front, Lee said.
“If downside risks to the economy increase from unexpected developments, the government should consider expanding fiscal spending through supplementary budget,” he said.
The central bank instead must save its ammunitions against unseen risks - especially from the alarming levels of household debt that could blow over once the U.S. interest rate increases accelerate. The current outstanding balance of household loans is estimated at 1,350 trillion won or above, given that the household loans extended by banks grew by 3 trillion won during the first two months of this year and loans by non-banking institutions rose by 3 trillion won in January alone.
“In the short-run, prospects for the recovery are bright. But uncertainties linger and then there is the geopolitical risk,” he said.
He maintained that the central bank won’t merely follow the U.S. counterpart and that domestic conditions are bigger factor behind its monetary action.
“We will decide raising interest rates upon developments in the domestic conditions. The inflation this year is estimated at 1.9 percent, near our target. But we cannot be certain the economy will do better just because macroeconomic risks have lessened,” he said.
In Seoul trading, the main Kospi ended Thursday at 2,148.61, up 0.93 percent, and secondary Kosdaq at 623.87, up 0.39 percent from the previous session. Dollar fell 0.3 percent to 1,129.7 won.
By Boo Jang-won
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