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BOK stuck in bind between slowdown, US Fed's rate hike
By Park Hyong-ki
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| Bank of Korea Governor Lee Ju-yeol checks key data on his laptop before holding the central bank's monetary policy meeting in Seoul, Thursday. / Korea Times |
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| U.S. Federal Reserve Chair Janet Yellen speaks at a press conference after announcing that the Federal Reserve will raise interest rates in Washington, Wednesday. This is only the second interest rate increase since June 2006. / EPA-Yonhap |
The Fed's tightening of its monetary policy could throw the nation into a more vicious cycle where households spend less due to their growing burden of debt payment, companies slash their investment further, and exports continue to fall on weaker global demand, leaving the economy mired in weaker, jobless growth.
The Bank of Korea (BOK) kept its key rate unchanged at 1.25 percent for this month, Thursday, after the U.S. Fed raised its rate by 25 basis points to 0.5-0.75 percent. The Fed said it will carry out further rate hikes — up to three — next year.
BOK Governor Lee Ju-yeol said the central bank will put a priority on risk management amid growing internal and external uncertainties.
"We've decided to keep the key rate unchanged due to uncertainty, currency volatility and the household debt," BOK Governor Lee told the press. "It is important to manage risks as financial instability would affect growth and inflation."
The central bank would also be reluctant to raise its interest rate following that of the Federal Reserve as that would further negatively affect the country's household debt, he said.
Lee said a series of steps led by the government to contain snowballing household debt, which hit 1,300 trillion won ($1.13 trillion), have failed to keep the lid on the debt growth.
Analysts said Korea is sitting on a ticking time bomb which quickly needs defusing to avert another crisis.
However, the BOK and the government have no effective policy tools to steer the economy out of the current doldrums.
The central bank appears to have no other choice but to take a wait-and-see mode to U.S. monetary policy under the Donald Trump administration, analysts said.
"The Korean central bank is not likely to have a clear policy direction. Should it raise the rate, it would affect household debt and the corporate bond market, thus hurting the economy," said Park Hyung-min, an economist at Shinhan Investment.
"It is in a position where it cannot move in a particular direction. The market will also have to see whether the U.S. could actually raise its rate three times next year aligned with Trump's fiscal policy."
The Fed indicated that its monetary policy still remains "accommodative" that can further help strengthen the job market and boost inflation toward its 2 percent target.
Analysts question whether the U.S. could raise its rate in three fiscal quarters out of four next year as this move could potentially undermine corporate fundraising and consumption.
However, based on the U.S. economic outlook, which remains rosy, analysts forecast much faster rate hikes than expected.
The U.S. economy is close to full employment, and inflation is expected to rise faster than Fed expectations. Its growth projection for 2017 will likely be revised upward as the Trump administration implements a fiscal stimulus.
"It is unclear how much of a fiscal stimulus will be enacted by the incoming Trump administration and Congress. ... There is a risk that rates will have to increase even faster than the Fed currently predicts," said Nariman Behravesh, chief economist at IHS Markit.
This could further fuel capital outflows and volatility in currency and stocks, analysts said.
The BOK chief, however, ruled out concerns over immediate foreign capital outflows on the U.S. rate increase, saying that the country has sufficient foreign reserves to withstand market disruptions.
