Bank of Korea holds fire on rates as new financial risks emerge

Date: Jan 15, 2021

South Korea kept official interest rates unchanged on Friday as the policy focus shifted away from an urgent need to support the economic recovery to growing risks from a hot stock market rally and booming household debt.

Governor, Lee Ju-yeol, gave few clues about the timing or direction of the next policy change but warned he was now closely watching the investor borrowing that had partly fuelled a doubling in the benchmark Kospi index since March last year.

“The Bank of Korea (BOK) is highly concerned that an expansion of investment through excessive leverage could cause losses that could be unbearable for investors should there be any price adjustments due to an unexpected shock,” Lee said at a briefing.

The BOK kept the base rate steady at a historic low of 0.5% in an unanimous decision at its policy meeting.

The caution now clouding South Korea’s policy deliberations highlights the balancing act authorities face in helping the economy return to growth after its coronavirus slump and keeping speculative investment in check.

The BOK is expected to maintain its easy monetary policy in 2021 even as the economy accelerates away from last year’s pain brought on by the coronavirus.

Twenty of 23 analysts polled see the bank holding rates through the end of this year, as policymakers will want to guarantee the recovery is stable before they even consider tightening policy.

A tentative recovery has been seen in exports, which expanded at their fastest pace in more than two years in December. But the number of jobs plunged at the sharpest rate in over two decades in December, a sign the recovery is still fragile amid the third wave of the coronavirus currently sweeping the country.

“The bank has made more comments about the build-up of financial imbalances, which I think it shows that the Monetary Policy Board’s focus is shifting towards financial imbalance from economic recovery,” said Paik Yoon-min, fixed-income analyst at Kyobo Securities, who sees the BOK increasing rates only in the fourth quarter of 2022.

The manufacturing-heavy economy is seen shrinking 1.1% in 2020, the first annual contraction in 22 years, before expanding 3.0% this year, according to the BOK.



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