SEOUL: The South Korean central bank chief's surprisingly stern warning on Thursday against betting on an imminent policy easing showed it was far more concerned about rising household debt than uncertain economic growth prospects.
This concern makes sense given that household debt, already among the heaviest in the world at 1.6 times average disposable income, has been growing at its fastest in years over recent months on the back of a recovering property market.
Reuters calculations show each South Korean household was carrying some 40 million won ($37,000) of loans owed to financial institutions as of November.
Bond yields shot up and foreign investors dumped bond futures on Thursday after Bank of Korea (BOK) Governor Lee Ju-yeol said economic growth would quicken, oil-driven disinflation is good, and household debt is a concern.
"He sounded surprisingly hawkish and made it very clear that household debt is a very important factor and far more important than low inflation for policy," Park Sang-hyun, chief economist at HI Investment & Securities, said on Friday.
Getting the rate of household debt growth to below the rate of disposable income growth is a top economic policy goal set by President Park Geun-hye, and senior government figures have once-again expressed their concern over debt levels in recent weeks.
"It's one of the very few things that we can never compromise on, and policy authorities will have to get more vigilant going forward," a senior government official told Reuters last month.
The ratio of household debt to annual disposable income stood at 161 percent in 2013, rising for a ninth consecutive year and a sharp rise compared to 144 percent five years before, the broadest central bank measure shows.
Outstanding mortgage loans owed by households jumped 9.9 percent in November over a year earlier, central bank data shows, marking the fastest pace since data compilation began in December 2008 and following a 9.5 percent rise in October.
South Korean policymakers are concerned that if borrowing grew to extreme levels, defaults by households could undermine the banking system and might in an extreme case spark a flight of capital out of Asia's fourth-largest economy.
The Bank of Korea also attaches a special meaning to the fact that the policy interest rate, the 7-day repurchase agreement rate, is now at the 2 percent level matching the record low touched during the peak of the 2008-2009 global financial crisis.
"Generally speaking, you may need a much more serious situation than normal to take the rate into an area never entered before," a senior official at the Bank of Korea told Reuters in late December.
Especially surprising to many analysts was that Governor Lee aimed his rhetoric against those betting on an interest rate cut even after trimming the central bank's economic growth forecast for this year by half a percentage point.
"We are particularly surprised by the BOK's decision to allow the negative output gap to grow and to last longer because it is in direct contrast to its previous behaviour," Young Sun Kwon, economist at Nomura in Hong Kong, said in a note to clients on Friday, referring to the lowered growth forecasts.
"The central bank communicates its forecasts, not its commitments, with the market," said Kwon of Nomura, who worked at the Bank of Korea for several years.
"If the market believes the BOK has an upward (rate) bias to its outlook or there is any disconnect between monetary policy decisions and the BOK's forecast changes, it could cause serious communication problems."
Comments
Comments are closed.