Bank of Korea warns of rate increase amid rising household debt

Bank of Korea Governor Rhee Chang-yong warned that a policy rate increase may be necessary if household debt continues to rise. Despite recent loan regulations, household loans increased by 4.9 trillion won in September.

Bank of Korea Gov. Rhee Chang-yong speaks during a parliamentary inspection held at the bank headquarters in cnetral Seoul on Monday. [BOK]

Bank of Korea (BOK) Gov. Rhee Chang-yong said on Monday a policy rate increase will be considered if the growth of household debt continues to accelerate.

The BOK “needs to keep a restrictive policy focused on price stabilization for a considerable time,” Rhee said during a parliamentary inspection held at the central bank office in central Seoul.

He added that a rate increase may be considered if the growth of household debt does not slow down even after the stricter loan regulations announced by the regulators last month. But he expressed concerns over its impact on the financial market.

Household loans extended by banks grew 4.9 trillion won ($3.6 billion) in September to 1,079.8 trillion won, slowing from a growth of 6.9 trillion won a month earlier.

The BOK’s Monetary Policy Board kept rates unchanged at 3.5 percent last week for the sixth straight meeting. The next rate-setting meeting is scheduled to take place on Nov. 30, a month after the two-day Federal Open Market Committee meeting kicks off on Oct. 31.

It is the responsibility of the BOK to lower the household debt-to-GDP ratio to below a 100 percent, but the rapid adjustment of the ratio through rates would have strong impacts on the economy, Rhee added.

Korea’s household debt-to-GDP ratio stood at 102.2 percent in the first quarter, according to the Institute of International Finance. Rhee also expressed concerns over inflation.

“Consumer price growth is expected to slow, but it is still significantly higher than the target rate of two percent,” Rhee said. “Recovery in spending is somewhat weak, but sluggish export is gradually improving, a trend that is projected to continue through next year.”

Consumer prices rose 3.7 percent in September from a year earlier, slightly up from 3.4 percent in the previous month.

Korea’s exports rose 4.6 percent on-year in the first 20 days of October thanks to shipments of automobiles and petroleum products. But imports rose 0.6 percent in the same period, resulting in a trade deficit of $3.74 billion.

But Rhee added that prices are generally moderating.

“If prices continued to rise, the board would have continued to raise the [policy rates]. But it hasn't shown a downward trend to reach 2.3 percent [in July], so [the board’s rate decision] was a result of a comprehensive judgment.”

The BOK estimated consumer prices to grow 3.5 percent this year and 2.4 percent in the following year.

BY JIN MIN-JI [jin.minji@joongang.co.kr]