The Bank of Korea left its key interest rate unchanged for the third consecutive month, justifying its decision with increasing household debt and uncertainty about the Fed’s decision on interest rate change. The central bank of South Korea kept the interest at a record low level of 1.25%. The regulator explained that economic growth remains in line with forecasts, although has some risks for the inflation target. In July, the bank cut its forecast for growth to 2.7% and inflation to 1.1%.
The Bank of Korea expects to see results of the decisions of central banks in USA and Japan later this month, before taking any action. The biggest challenge of the economy growth is household debt, which reached a historic high of 1.257 trillion KRW (1.15 trillion USD) at the end of June. The debt is not a short-term threat for the economy, but may pose a risk in the long run if it limits the spending capacity of the households.
Other challenges to the economy of South Korea include corporate restructuring and the Law on Anti-Corruption, scheduled to take effect later this month. The Korean Institute of Economic Research predicted that this law will cost the food industry and retail about 11.6 trillion KRW per year.
Bank of Korea explained that domestic demand continues to improve and promised closely to monitor household debt, changes in monetary policy of major economies and progress in corporate restructuring in the country.
Meanwhile, the economic data improved in recent months. The South Korean exports in August rose for the first time in more than an year and a half. Growth in gross domestic product was revised up to 0.8%. The consumer prices, however, rose only by 0.4% in August, far below the set by the Central Bank target for inflation of 2%. The slow increase was due to the decrease in electricity bills.
Analysts expect the bank further to reduce its key interest rate in coming months.
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