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(3rd LD) BOK freezes key rate amid virus fallout and growing household debt

13:47 October 14, 2020

(ATTN: RECASTS throughout with details; CHANGES headline, photo)
By Kim Soo-yeon

SEOUL, Oct. 14 (Yonhap) -- South Korea's central bank froze its key interest rate at a record low Wednesday amid heightened economic uncertainties over the protracted coronavirus outbreak and rising housing prices.

The Bank of Korea (BOK) also voiced concerns about the fast growth of household debt as asset markets, such as the housing market, could become unstable due to excessive household loans.

In a unanimous decision, the BOK's monetary policy board kept steady the benchmark seven-day repo rate, called the base rate, at 0.5 percent for the third straight time.

Bank of Korea Gov. Lee Ju-yeol leads the bank's rate-setting meeting on Oct. 14, 2020, in the photo provided by the BOK. (PHOTO NOT FOR SALE) (Yonhap)

In August, the BOK froze the key rate, citing the fallout of a flare-up in new coronavirus cases. In July, the bank left the rate unchanged as well.

To bolster the pandemic-hit economy, the BOK slashed the base rate to an all-time low of 0.5 percent in May after delivering an emergency rate cut of half a percentage point in March.

The BOK said Asia's fourth-largest economy is likely to recover gradually, helped by improving exports, but uncertainties for the economic outlook seem to be "elevated."

"Uncertainty for the growth path remains higher than at any time in light of a resurgence in virus cases and deepening (trade) tensions between the United States and China," BOK Gov. Lee Ju-yeol said at an online press briefing.

"The BOK plans to maintain the accommodative monetary policy stance until the fallout of the COVID-19 pandemic weakens, and the local economy will recover subsequently," he said, signaling that there would be no imminent change in the policy rate for the time being.

The rate freeze came as economic uncertainty has increased despite the latest slowdown in virus cases, while booms in asset markets, including the housing and stock markets, warrant close monitoring.

In August, the BOK revised down its 2020 growth outlook to a sharper-than-expected contraction of 1.3 percent, citing the impact of a resurgence in virus cases.

The South Korean economy contracted 3.2 percent in the second quarter from three months earlier after shrinking 1.3 percent on-quarter in the January-March period.

This file photo, taken June 4, 2020, shows stacks of import-export cargo containers at South Korea's largest seaport in Busan, 450 kilometers southeast of Seoul. (Yonhap)

Private consumption remains sluggish as people refrain from visiting offline shops amid the virus outbreak.

The country's new virus cases had been in the triple digits for more than a month since Aug. 14. Daily infections slowed down on the back of weekslong tougher virus curbs, but virus cases have stayed around 100 in recent days.

On Wednesday, South Korea reported 84 more COVID-19 cases, including 53 local infections, raising the total caseload to 24,889, according to health authorities.

But exports, which account for about 50 percent of the economy, rebounded for the first time in seven months in September, aided by increased shipments of chips and cars.

The country's overseas shipments took a beating due to the fallout of the COVID-19 pandemic. But the pace of the slump has eased since June as major countries began reopening economic activities following stringent lockdowns.

The BOK chief, meanwhile, said the latest growth pace of household debt is worrisome even though households' indebtedness cannot help climbing amid the virus outbreak.

Banks' household lending continued to grow fast in September due mainly to a sustained increase in home-backed loans amid soaring housing prices. Demand for unsecured loans also shot up for property-related costs and stock investments.

Household credit reached a record high of 1,637.3 trillion won (US$1.43 trillion) as of end-June.

"If household loans excessively make their way to asset markets, they could increase financial imbalances," Lee said.

This photo, taken Oct. 13, 2020, shows a testing center for the new coronavirus in central Seoul. (Yonhap)

The governor said the growth of the consumer inflation is expected to fall back below 1 percent in the fourth quarter, underscoring the outlook for low inflationary pressure this year.

The consumer prices climbed 1 percent on-year in September on a rise in farm prices, the sharpest gain in six months. The BOK aims to keep inflation at 2 percent over the medium term.

Analysts said the BOK is expected to maintain the policy rate for the remainder of the year as it faces limited room for further cuts. They forecast the bank to keep the rate freeze mode until next year.

"The BOK will face growing pressure to roll back excessive liquidity in the mid and long term," Shin Dong-su, an analyst at Eugene Investment Co., said.

"But as the local economy will take time to recover to the pre-pandemic level, the bank is expected to keep the current policy stance at least until the first half of 2021," he added.

sooyeon@yna.co.kr
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