October 18, 2018 / 1:59 AM / 8 months ago

South Korea holds rates but leaves door open for November hike

SEOUL (Reuters) - South Korea’s central bank kept its benchmark rate unchanged on Thursday but flagged concerns about mounting household debt and financial stability, boosting expectations that it could raise rates as soon as next month.

FILE PHOTO: The logo of the Bank of Korea is seen in Seoul, South Korea, November 30, 2017. REUTERS/Kim Hong-Ji

While the Bank of Korea downgraded its gross domestic product growth forecasts for this year amid growing risks to global trade, its governor said the revised outlook still reflected the country’s “potential growth rate”.

The central bank kept its benchmark seven-day repurchase rate KROCRT=ECI at 1.50 percent, as expected by 14 of 21 economists in a Reuters poll.

However, two of the bank’s seven board members voted against the decision to hold rates, BOK governor Lee Ju-yeol said at a press conference after the decision on Thursday, an indication it may be moving towards a change in policy.

Governor Lee flagged worries about rising household debt and said “it’s time to focus on financial imbalances if economic recovery is stable and inflation is reaching the target level.”

Board members Lee Il-houng and Koh Seung-beom dissented in a 5-2 vote to keep the benchmark unchanged.

In the past, dissenting votes at policy meetings have portended subsequent changes in the rate. In 2017, Lee Il-houng voted against the hold in October before the board raised rates the following month, the first tightening in more than six years.

“(Lee’s press conference) was more hawkish than markets had expected. Lee said many times that its time to focus on financial stability now that growth rate is nearing the nation’s potential level, and inflation is reaching the target level,” said Park Sung-woo, a fixed-income analyst at Heungkuk Securities.

“A hike in November is almost a done deal.”

The December contract on South Korea’s three-year treasury bond futures KTBc1 fell 0.04 points to 108.43 after the press conference, a sign markets were pricing in a rate hike this year.

South Korea’s policymakers have voiced concerns about a debt-binge in the private sector. Household debt was about 95 percent of GDP in the first quarter of this year, data from the Bank for International Settlement shows, far above the average of 60.8 percent for the Group of 20 nations.

Rising U.S. interest rates have also created concern among policymakers and investors about the growing gap between benchmark rates in South Korea and the U.S. and the potential for capital flight.

While headline inflation is still below the bank’s target of 2.0 percent, September consumer inflation inched up to 1.9 percent in annual terms, removing a potential hurdle for further policy tightening.

There are, however, persistent risks to the monetary policy outlook.

Lee said the GDP growth forecast for this year was cut to 2.7 percent from the previous projection of 2.9 percent.

A statement released after the rate decision showed policymakers were concerned about weak job growth and trade frictions between the United States and China, which are raising fears of collateral damage to other export-reliant Asian economies.

The accelerating tit-for-tat trade war between Beijing and Washington also leaves South Korea’s export sector vulnerable with shipments declining 8.2 percent in September from a year earlier, the biggest drop in over two years.

South Korea’s labor market recovered modestly from a month earlier with the unemployment rate falling to 4.0 percent in September from 4.2 percent in seasonally adjusted terms, but the government report showed manufacturers and retailers still shedding jobs following increases in minimum wages.

The BOK’s next monetary policy meeting is scheduled for Nov. 30.

Reporting by Cynthia Kim and Hayoung Choi; Editing by Sam Holmes

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