South Korea seen raising rates as financial risks grow

South Korea is expected to raise interest rates on Thursday, making it the first major central bank in Asia to do so in the pandemic era as surging household debt and home prices threaten financial stability.

However, the decision could be a close call with only 16 of 30 analysts surveyed by Reuters expecting the Bank of Korea (BOK) to raise its base rate (KROCRT=ECI) by 25 basis points to 0.75%, while the other 14 see the bank keeping it unchanged at the record low.

If it raises rates this week, South Korea will become Asia’s first major economy to begin normalising easy monetary policy even as the country struggles to contain the spread of the coronavirus outbreak.

With only three meetings left until the end of the year, 14 of 22 analysts who gave end-2021 forecasts see the bank only raising once, while the other eight sees once more.

“The BOK has been concerned about accumulating financial imbalances since May …(therefore) it will make a policy decision with more weight on financial stability than economic fundamentals,” said Woo Hye-young, fixed-income analyst at eBest Investment & Securities.

“Though the economy is under constant pressure from the COVID-19 resurgence, it is seen achieving growth of more than 4% for this year,” Daishin Securities’ economist Kong Dong-rak said, reducing the possibility of a rate freeze.

Bank lending to households grew 9.7 trillion won ($8.32 billion) last month alone, accelerating even after the government began enforcing new caps on bank loans in July.

Meanwhile, Koh Seung-beom, a BOK board member and now the incoming chief at the Financial Services Commission, pledged last week to slow debt growth, saying that household debt management is his top priority.

South Korea has struggled with record coronavirus infections in recent weeks, even under the toughest restrictions imposed in Seoul and neighbouring areas. Only 23.9% of the 52 million population have been fully vaccinated as of Monday midnight.

In the same poll, all 18 analysts who gave end-2022 forecasts see the central bank raising rates next year.

Of those 18, 10 saw the base rate at 1.25% by the end of next year, while seven see it at 1.00%. One sees it at 1.50%.

The central bank will also this week release its revised forecasts for growth and inflation. The latest outlook for GDP and consumer prices are at 4.0% and 1.8%, respectively.

($1 = 1,166.5000 won)