Low rate to be unchanged for the time being

By Yoon Ja-young

The Bank of Korea (BOK) can ill-afford to tighten its monetary policy even if the U.S. Federal Reserve proceeds with its much-anticipated key rate hike later this month, analysts said.

The central bank has left its key rate at a historically low 1.5 percent. Korea needs to follow in the footsteps of the U.S. Fed, lest it should face capital flight.

However, analysts are betting that the BOK will have to maintain its current monetary easing for a while. The bank holds a policy-setting monetary committee meeting today to decide its key rate for December.

Analysts expect the BOK to hold the rate steady, saying the hike by the Fed will not have any major impact on the Korean financial market.

Hong Jun-pyo, an economist at Hyundai Research Institute, said any exodus may be limited even after the U.S. rate hike.

“Korea has sound foreign exchange rates right now, and in this way, the country is different from other emerging economies that are facing the risk of an exchange crisis.”

He said Korea’s interest rate is already higher than those of countries with similar credit ratings.

While the United States is considering its hike on the back of its economic recovery, this isn’t so with Korea.

Impact on won, exports

That’s why some analysts even expect Korea may be pressured to move in the opposite direction.

“Sluggish exports are likely to continue for a considerable period of time, and domestic consumption, which led recent growth, has been based on temporary stimulus measures. The demand for a key rate cut may resurface in the first half of next year,” said Kim Soo-jung, an analyst at Hana Institute of Finance.

The analyst said that monetary easing by China and Japan will also increase demand for a key rate cut due to the relative strengthening of the Korean won.

The economic slowdown following corporate restructuring may also increase the need for a further cut.

Economists are more concerned about exports, which will slow down after the U.S. rate hike.

“The decrease of exports to emerging countries will be bigger than the export increase to the United States. Economic slowdowns and decreasing demand for imported goods in emerging countries will in turn adversely affect Korea’s exports,” Hong said, adding that the impact will be even bigger due to the slowdown in China.

However, cutting the rate isn’t a cure-all. Kim says there is general consensus among economists that a cut will not be as effective in stimulating economic growth as it used to.

Bigger risks remain because of household debt, especially if the rate remains low.

“When we consider only growth and inflation, it would be better for Korea to delay a rate hike. However, that means there will be more household debt, increasing the risk for the economy,” said Park Jong-kyu, a research fellow at the Korea Institute of Finance.

According to the BOK, household debt totaled 1,166 trillion won as of September, up 3 percent from a year ago. The historically low interest rate prompted households to obtain loans.

The ratio of debt to disposable income stands at 164.2 percent, much higher than the average 135 percent for other Organization for Economic Cooperation and Development (OECD) member countries.

As only 29.7 percent of household debt is on fixed interest rates, the rising interest will force families to cut spending, further weakening the economy on top of hurting the soundness of the financial sector.