BOK vows to be “discreet” in additional rate hikes next year

2017.12.28 16:02:31 | 2017.12.28 17:09:21

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The Bank of Korea is upbeat about next year’s economy, but will nevertheless “discreetly” move with additional hikes in interest rates.

The economy will continue to grow in a steady pace, and inflationary pressure from demand side won’t be that big, said the central bank in its monetary policy outline for 2018 after a meeting of the monetary policy committee on Thursday.

The bank last month raised the key interest rate for the first time in more than six years. It bumped up the rate by a quarter percentage point to 1.50 percent from the record low of 1.25 percent kept since June last year and indicated two additional hikes if economic conditions allow.

“We will discreetly judge additional moderation in the monetary policy kept accommodative to low growth and inflation after thorough study in economic and price performance,” it said.

The bank, meanwhile, will up its purchase of new government bonds beyond its capacity of 2.2 trillion won ($2.1 billion) holdings near maturity to ensure liquidity flow amid rising interest rates.

The central bank forecasts the economy to grow more than 3.0 percent at an annualized rate in 2018 for the second straight year following this year. It expects inflation to stay within its target level of 2.0 percent, and the core inflation, which excludes oil and farm produces, to hover around 1.5 percent to 2.0 percent.

The dangerous level of household debt could pose as a bigger influence in monetary policy than macroeconomic factors behind further tightening action. Household debt could translate into a financial crisis if rates are pushed up too fast.

As of the end of September, household debt hit a new historic high of 1,419.1 trillion won, a figure tantamount to the country’s total gross domestic product.

Central banks of the U.S., European Union, and Japan are all moving to normalize rates, which could be another pressure on the Korean central bank.

By Kim In-oh and Cho Jeehyun

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