December 19, 2018 / 12:09 AM / 6 months ago

UPDATE 2-S.Korea's policy chiefs see high economic uncertainty

* Bank of Korea chief says household debt growth still high

* Finance minister says economy faces increased uncertainty

* Bond yields drop on diminished views over rate hike in 2019 (Updates after finance minister-central bank chief meeting)

By Hayoung Choi and Choonsik Yoo

SEOUL, Dec 19 (Reuters) - South Korea’s new finance minister warned on Wednesday that uncertainties facing the economy are high, calling for “harmony between fiscal and monetary policy”, while the central bank chief renewed caution over still-high household debt growth.

Finance Minister Hong Nam-ki, who paid a courtesy call on Bank of Korea Governor Lee Ju-yeol after his inauguration last week, said just before their meeting that fiscal policy needed to be in harmony with monetary policy.

Both later clarified that the remarks about “harmony” in policy to deal with heightened uncertainties had nothing to do with interest rates.

The country’s two highest economic policymakers agreed that South Korea was facing high uncertainties both internally and externally, the two agencies said in separate statements.

Their remarks and clarification subsequently sent bond prices down. Analysts said weakening economic momentum both at home and abroad likely meant there would be little need for additional monetary tightening in 2019.

“The government’s stance has changed in recent weeks toward worrying more about the economic uncertainty and this means chances for another rate hike next year are getting very slim,” said Yoon Yeo-sam, a fixed-income analyst at Meritz Securities.

The Bank of Korea raised the seven-day policy rate by 25 basis points to 1.75 percent on Nov. 30, a move the central bank had said was to curb household debt growth rather than to cool the economy.


Governor Lee said during a year-end dinner meeting with reporters late on Tuesday that household debt growth had fallen slightly but was still high and warranted continued attention. He added that his views on economic growth and inflation had not changed from projections made in October.

His remarks were published on Wednesday.

Treasury bond yields have fallen since the Nov. 30 rate hike as investors priced in no further tightening next year, with the liquid three-year yield now standing at 1.783 percent, just above the seven-day policy rate.

“It was too soon for the governor to change his views after the (Nov. 30) rate increase, but everyone sees things getting worse and worse as reflected in the bond yields,” Yoon at Meritz added.

Governor Lee cited China-U.S. trade disputes, falling semiconductor prices and hawkish U.S. central bank policy as risks to South Korea’s economy, which relies heavily on exports for growth.

He said he would update the central bank’s views on the economic and financial conditions in January, when it is scheduled to revise its economic forecasts. Economists and fund managers expect downward revisions.

On Monday, the finance ministry cut next year’s economic growth target to 2.6-2.7 percent from 2.8 percent projected in July, and lowered its 2019 inflation forecast to 1.6 percent from 1.8 percent.

The Bank of Korea’s latest projections are for the economy to grow 2.7 percent and inflation to reach 1.7 percent next year. (Editing by Sam Holmes and Jacqueline Wong)

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