BOK faces rate dilemma amid stronger growth, record household debt

The Bank of Korea (BOK) faces a dilemma over whether to raise its policy rate at a meeting later this week, as stronger-than-expected economic growth supports another hike while record-high household debt poses a growing concern, market watchers said Monday.

The central bank will hold its Monetary Policy Board meeting Thursday to decide the policy rate, which currently stands at 2.75 percent after the BOK raised it by 25 basis points last month.

Markets are closely watching whether the central bank will deliver a second consecutive rate hike or pause after last month's increase.

Economists who expect another rate hike point to stronger-than-expected second-quarter growth and continued inflationary pressures.

Korea's economy grew 0.6 percent in the second quarter from the previous quarter, supported by strong semiconductor exports.

Park Jeong-woo, an economist at Nomura Securities, said the growth momentum remained strong.

"Robust economic growth continues, with gross domestic product growth above 3 percent year-on-year for two consecutive quarters," Park said. "Although the growth composition remains uneven, with the chip upcycle driving exports and investment, the growth cycle appears to be moving more firmly into the expansion zone."

Park expects the BOK to deliver three more 25-basis-point hikes, including a back-to-back hike in August, taking the policy rate to a terminal rate of 3.5 percent in February 2027.

However, the BOK faces a major challenge in tightening monetary policy — record-high household debt.

Household debt surpassed 2,000 trillion won ($1.44 trillion) for the first time in the second quarter, according to BOK data. The increase was driven largely by a rise in housing-related loans amid higher home prices, as well as increased borrowing for stock investments amid the KOSPI rally in the first half of this year.

A further rate hike could put additional pressure on highly leveraged households and financially vulnerable borrowers.

Kim Sung-soo, an analyst at Hanwha Investment & Securities, expects the BOK to keep its policy rate unchanged at the upcoming policy meeting.

Instead, he expects the central bank to resume rate hikes in October and January 2027, eventually raising the policy rate to 3.25 percent.

"Robust growth may ease concerns about the need for tightening, but it does not in itself provide sufficient justification for another rate hike in August," Kim said in a report.

Kim also pointed to the won's recent strengthening and stable foreign-currency funding conditions as reasons for the BOK to hold off on another hike this month. The won-dollar exchange rate fell below 1,400 won for the first time in nearly 11 months last week.

The analyst also said the effects of July's rate hike and the government's newly announced housing measures on Aug. 13 had not yet been fully reflected in economic data, providing another reason for the central bank to wait before tightening further.