BOK unlikely to cut rates this year: Gov. Rhee

Bank of Korea Gov. Rhee Chang-yong speaks during the 45th Jeju Forum hosted by the Korea Chamber of Commerce and Industry, at Jeju Haevichi Hotel Resort, Seogwipo, on Friday. (KCCI)

The Bank of Korea is unlikely to cut interest rates this year because of uncertainty in the inflation outlook and massive household debt, central bank Gov. Rhee Chang-yong said Friday.

"It is difficult to say that we will lower the interest rates for the time being, so don't expect too much that there will be a drop in the interest rates," he said during the 45th Jeju Forum hosted by the Korea Chamber of Commerce and Industry at Jeju Haevichi Hotel Resort.

"We will look at the situation by the end of the year and adjust rates on a macro scale," he said.

His remarks came a day after the policy bank decided to keep its key rate unchanged at 3.5 percent for the fourth straight time.

After the country’s consumer prices, a key gauge of inflation, moderated to 2.7 percent on-year in June from a 3.3 percent increase in May, there have been expectations that the central bank would dial down the volume of monetary tightening.

“What the Bank of Korea is cautious about is that prices are likely to rise to 3.5 percent by the end of the year, considering the base effect,” Rhee said.

The BOK has an official annual inflation target of around 2 percent.

With the uncertainty about whether inflation is clearly on a downward path, along with the US Federal Reserve's signals that it may raise rates twice more before the year’s end, there are concerns over how Korea’s foreign exchange market will react, he said.

The high level of household debt here also presents a "big burden" to cutting key rates over the long term.

“Household debt has risen in the last three months, and it can't be helped in the short term, but if debt increases too much, interest rates should be raised again,” Rhee said.

On Thursday, the BOK governor also mentioned that Korea is the only country that holds household debt that is equivalent to over 100 percent of its gross domestic product. "In the mid to long-term, it would be good for the Korean economy for that figure to go down to the 80 percent level," he said.

By Park Han-na(hnpark@heraldcorp.com)