BOK holds rate at 3.5% amid rising concerns over economic uncertainty

Bank of Korea (BOK) Governor Rhee Chang-yong bangs a gavel during a monetary policy board meeting held at the BOK headquarters in central Seoul, on Aug. 24. [Photo by Yonhap]

The Bank of Korea (BOK) kept its benchmark rate unchanged at 3.5 percent on Thursday despite the soaring household debt as concerns grow over the slowing economy.

The central bank left the benchmark rate unchanged at 3.5 percent, following the four previous pauses in February, April, May, and July.

The freeze is seen as a prudent move by the BOK as it needs time to assess the economy and monitor potential developments in the domestic and global economy, both of which have become more vulnerable amid the recent real estate turmoil in China.

In particular, with the upcoming speech by the U.S. Federal Reserve Chairman Jerome Powell at the Jackson Hole meeting on Friday, the BOK intends to closely observe the current situation to determine whether the Fed is inclined to implement further tightening measures.

The BOK’s latest decision to freeze the rate has been driven by uncertain economic conditions.

All economic indicators, ranging from private consumption, exports and imports, and investment to government spending, have gone on a downward trend despite a slight rise in the second quarter’s economic growth rate of 0.6 percent from the previous quarter.

Korea faces a weaker chance of economic recovery in the second half of this year, with Country Garden, a Chinese real-estate developer, being put at a greater risk of a default, and the subsequent growing possibility of a China-induced economic crisis amid concerns of further tightening by the U.S. government.

For the BOK, however, soaring household debt and inflation are the main barriers to lowering the base rate despite the current economic downturn.

While the BOK has maintained its stance of a pause on rate hikes, the country’s household debt has rapidly increased. Household credit balances escalated by 9.5 trillion won ($7.16 billion) during the second quarter after a decline in the fourth quarter of last year and the first quarter of this year.

The exchange rate between the Korean won and the U.S. dollar returned to a range of 1,340 won per dollar amid a historic record rate gap at 2 percentage points. The gap, however, is likely to widen given the prospect of an additional hike by the U.S. Fed.

Although inflation dropped to its lowest level in 25 months at 2.3 percent in July, experts highlighted the substantial underlying factors, asserting that the potential for inflationary pressure still remains.