SEOUL- South Korea’s central bank is expected to hold its key interest rate at a record low 1.25 percent on Friday, its policy options constrained by sky-high household debt and the U.S. Federal Reserve’s plans to speed up its rate-hike cycle.
All 23 analysts surveyed by Reuters forecast the Bank of Korea would keep its base rate steady for a seventh month at its meeting on Friday.
Seven analysts foresaw a rate cut later this year, while an HI Investment & Securities analyst said the Bank of Korea’s (BOK) next move would be a hike in early 2018.
Nomura International and Goldman Sachs Group are among those who recently pushed back projections for further monetary easing this year, citing the Fed’s expected tightening cycle and risks from the influence-peddling scandal that embroiled President Park Geun-hye.
Bets on a further policy easing waned, given the economy would face an increased capital outflow risk and a further increase in household debt if the BOK were to cut its reference rate - just as the U.S. starts to raise its Fed funds target.
South Korea is waiting for a constitutional ruling on parliament’s impeachment of President Park, which could take months and jeopardize government policies even as the economy struggles with sluggish exports and weak consumption.
BOK Governor Lee Ju-yeol said in December that downside risks to growth appeared to have increased from October, when his team last revised the growth outlook to 2.8 percent for 2017.
“Downside risks seem to outweigh upside risk. We will monitor the growth path for another month before reviewing the outlook in January,” Lee told reporters in December after leaving rates unchanged.
The BOK issued a report in December warning that the debt-servicing capacity at some of the most vulnerable households could fall as they brace for higher loan rates stemming from rising yields in the United States.
Household debt stood at a record high of 1,295.8 trillion won ($1.08 trillion) at the end of the third quarter of 2016, up 11.2 percent from a year earlier.
Aside from the rate decision itself, the BOK will also issue revisions to its quarterly outlook for inflation and economic growth.
The finance ministry slashed its growth outlook to 2.6 percent from 3 percent earlier, citing weaker domestic demand and slower job growth for the year ahead. – Reuters