Korea’s potential growth on decline: BOK chief

Base rate unchanged to stay at 1.5%

Published : Nov 12, 2015 - 18:00 Updated : Nov 12, 2015 - 18:44

The Bank of Korea’s seven-member policy committee kept the benchmark rate untouched at 1.5 percent during their monthly gathering Thursday. It said their decision was unanimous during a news briefing session.

As the central bank conducted cuts by 100 basis points between August 2014 and June 2015, the key interest rate is to stay at the historic low level for the sixth consecutive month until the next rate-setting meeting, which is slated for Dec. 10.

BOK governor Lee Ju-yeol -- asked about the outlook on Korea’s midterm gross domestic product growth -- shared the view in the market that Korea’s potential growth rate is in a downward trend.

He said the nation’s potential growth rate is estimated to have stayed under the former projection of 3.5 percent. “But I don’t think it has dropped to below 3 percent.”

Lee said that the bank was still taking a cautious stance on publicizing the updated figure in contemplation of a variety of calculation variables, adding that lower potential could be attributable not to temporary factors like the export slump but to structural factors in the economy.

Bank of Korea headquarters in Seoul (Bloomberg)

Concerning the sagging exports, Lee agreed the protracted slump is restricting the recovery of private consumption in some manner.

Asked about the feasibility of a shock after the likelihood of a rate hike in the U.S. next month, he downplayed it, citing Korea’s robust surplus in current account balance and soundness in foreign reserves in the financial sector.

In a statement, the BOK said monetary policy committee had to take mounting household debt into consideration, which have been regarded as the biggest threat to the economy.

Household loans extended by local lenders increased at the fastest clip last month, reaching 624.8 trillion won ($539.8 billion) in October, up 9 trillion won from a month earlier.

The bank has vowed to closely monitor the trend of the increase in oustanding household debt and external risk factors, such as any changes in the U.S. Federal Reserve’s rate-setting or in economic conditions in emerging market countries, including China, as well as the trends of capital flows.

For the recent government-led corporate restructuring, Gov. Lee said it is the right time to weed out heavily indebted and unprofitable companies in the face of a trend of higher rates, probably started by the U.S.

He said that a low rate trend has some adverse effects, including the rising number of such unviable companies.

Financial regulators including the Financial Supervisory Service are pushing local lenders to sort out troubled companies to get prepared for lingering external uncertainties.

By Kim Yon-se (kys@heraldcorp.com)