Deflation risk pressures BOK to reduce rate

The Bank of Korea is expected to freeze its key base rate at the monetary policy committee meeting this week.

However, it will likely face pressure to lower the key interest rate next month as deflation concerns further deepen, analysts said.

BOK Gov. Lee Ju-yeol had indicated that the central bank would have to keep household debt in check following an increase in bank borrowing fueled by low interest rates, hinting that it may keep its rate steady this month.

The central bank recently formed a consultative committee with the Ministry of Strategy and Finance and the Financial Services Commission to manage rising household debt.

The BOK cut its key base rate in August and October last year to a record low of 2 percent. Bank loans extended to households stood at 37 trillion won ($34 billion) last year.

“The central bank has adequately spurred easy money and needs to measure the effects of those rate cuts,” Lee recently said.

Falling consumer prices and industrial production are weighing on the country’s economic recovery. Aside from its conventional monetary policy, the central bank can also expand credit for small and medium enterprises.

However, the government has raised concerns over deflation. Finance Minister Choi Kyung-hwan noted that when excluding the rising price of tobacco, Korea’s inflation has turned negative.

“The private sector needs to raise employee wages to boost domestic consumption,” Choi said recently at a forum.

The ministry is expected to frontload spending in a bid to accelerate recovery. Choi noted that Korea’s economic recovery remains slow and weak, and will never return to the growth experienced during the 1970s and 1980s.

KDB Daewoo Securities projected in a report that the central bank’s monetary policy committee may move toward lowering its key rate by 0.25 percentage points and revising its economic outlook next month.

By Park Hyong-ki (hkp@heraldcorp.com)