BOK prioritizes financial stability

Bank of Korea Gov. Lee Ju-yeol stressed Thursday that the central bank’s main priority was maintaining stability by paying close attention to rising household debt and the possibility of quantitative easing by the European Central Bank.

In a meeting with foreign press in Seoul, South Korea’s top monetary policymaker said that it was necessary to manage risk and come up with countermeasures for high household debt and market volatility expected from eurozone stimulus.

The ECB is expected to begin QE to combat deflation.

He added that this would be more appropriate, hinting to the market that the central bank would be against making monetary policy more expansionary.

“The central bank has adequately spurred easy money given that it lowered the key interest rate twice last year,” Lee said.

“We need to see and measure the effects of those rate cuts.”

The BOK cut its key base rate in August and October last year to a record low of 2 percent, which drove down borrowing costs and fueled household debt. Bank loans extended to households stood at 37 trillion won ($34 billion) last year.

Also, with the country’s household debt climbing since October last year, the central bank will have to take precautionary measures to stabilize the financial market.

Lee added that the same went for countering the ECB’s capital injection into the sovereign bond market, although the BOK has been carrying out monetary policy in line with the market’s expectations of European monetary stimulus.

The governor said that the BOK’s recent reduction in its growth projection to 3.4 percent this year did not mean that it was pessimistic about the Korean economy.

Last week, the central bank revised down its forecast from 3.9 percent amid weakening consumption and private investment, while cutting its inflation outlook to 1.9 percent from 2.4 percent.

Lee said that the 3.4 percent forecast would closely align with the country’s potential growth rate this year. The Finance Ministry projected Korea’s growth at 3.8 percent, which was revised down from 4 percent last month.

“The 3.4 percent growth projection may appear low, but (we readjusted this) due to an ‘exceptional factor,’ and does not indicate that we are pessimistic about the economy.”

The exceptional factor refers to Korea’s expected fourth quarter growth of 0.4 percent last year, which would be lower than its initial forecast of 1 percent.

The Korean central bank expected an average of 1 percent growth every quarter this year, adding that this year’s economy would get better than last year, although the country’s economic recovery may not be felt by the general public.

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