By Kim Yoo-chul
The chief of Bank of Korea (BOK), the country’s central bank, has warned that rising trade protectionism in the United States may hurt the Korean economy.
“The rise of U.S. trade protectionism is steeper than expected. This is worrying the central bank. Given Korea’s heavy reliance on exports, U.S. protectionism may have a negative impact on exports, and this will have a direct impact on the country’s economy, as well,” BOK Governor Lee Ju-yeol told reporters in Zurich after signing a bilateral currency swap agreement with Switzerland.
The BOK chief said the bank should keep a watchful eye on the Trump administration.
Lee said the bank is ready to respond to any negative impact from a faster-than-anticipated U.S. policy tightening, though he stressed the bank will consider “domestic factors” before raising its benchmark interest rates.
“If the Korean economy continues to grow 3 percent annually as expected with international financial markets seeing a steady rise in interest rates, then the BOK may consider raising the key rates,” Lee said, adding the bank is less likely to adjust its monetary policy just because of the changes of the US rate policy.
“But if the Federal Reserve (Fed) moves faster in adjusting its monetary policy than expected, or banks in Europe move on tightening their monetary policy, this will have an impact both on local and international markets. Therefore, the bank is prepared to respond to such a scenario,” said the top bank official, adding the bank expects the U.S. to raise its interest rates three times this year.
Regarding the issue of the increasing household debt, Lee said the bank will take a long-term assessment to address this issue because the credit risk is less likely to have a short-term impact on the country’s economy.
Korea’s total household debt soared to a record high of 1,400 trillion won. One of the bad legacies of the former administration in Korea is an explosion in household borrowing as Koreans borrowed money at a record pace for homes and to start small businesses.
The Moon Jae-in government is taking on the issue as it believes risk management of household debt is more important than at any other time due to growing uncertainties at home and abroad. It is taking steps to tackle the country’s mounting pile of personal debt because the debt will weigh on consumer spending.
The BOK governor remains cautious on redenomination because a currency redenomination may have a negative impact on the real-estate market and prices for consumer goods.
“As redenomination will have a significant impact on the public, we can’t do this without consensus. This is not an issue the BOK should handle independently,” said the governor.
Currency redenomination by a nation's government would be highly likely to include redenomination of locally held deposits in domestic banks. Once a redenomination is announced or there is speculation that it will happen, domestic banks become vulnerable to a variety of market reactions. Asset devaluation and draining liquidity could also be expected in such a scenario and would add to the pressure on banks' viability.