The Bank of Korea (BOK), which cut its rate by 25 basis points in June, said household lending was rising faster than in recent years and that it "will closely monitor the trend of increase in household debt, any changes in the monetary policy of major countries, and the progress of corporate restructuring."
The BOK has become increasingly concerned over the rise in debt levels and the minutes of its policy board meeting from last month showed that four of its six members had expressed concern about rising household debt.
In past policy statements, the BOK has often said it was monitoring household debt, but typically this followed references to global economic issues, such as the impact of the U.K. decision to leave the European Union, the monetary policies of advanced economies or capital flows.
In today's statement, however, the rise in household debt was the first topic mentioned by the BOK in its list of issues that it is closely monitoring.
In each of the previous seven policy statements published this year, household debt was never listed as the first issue of concern to the BOK, but normally the final one.
At its July monetary policy board meeting, one of the six board members was quoted as saying that the corporate credit cycle had been contracting since the first quarter of 2015 but the household credit cycle has been expanding since 2014, a sign it is alienated from the real economy.
Another board member was also quoted as saying that the ratio of household debt to disposable income had risen to 145.6 percent in the first quarter of this year from 139.8 percent last year and 130.7 percent in 2012.
South Korea's inflation rate eased to a 2016-low of 0.7 percent in July from 0.8 percent in the preceding two months.
The BOK expects inflation to approach its 2.0 percent target in the first half of 2017 and last month trimmed its inflation forecast for this year to 1.1 percent from 1.2 percent previously expected.
The economy grew by an annual rate of 3.2 percent in the second quarter of this year, up from 2.8 percent in the first quarter and above expectations. Last month the central bank lowered its 2016 growth forecast to 2.7 percent from a previous 2.8 percent.
After weakening from September 2014 to February this year, the won has been gaining steadily and was trading at 1,097.2 to the U.S. dollar today, up 7.2 percent so far this year.
The Bank of Korea issued the following statement:
"The Monetary Policy Board of the Bank of Korea decided today to leave the Base Rate unchanged at 1.25% for the intermeeting period.
Based on currently available information the Board considers that the trend of economic recovery in the US has been sustained and that the Chinese economy has maintained its moderate pace of growth. However, the improvements in the euro area have weakened. The Board forecasts that, while the global economy will maintain its weak recovery going forward, it will be affected by factors including changes in the monetary policies of major countries, the uncertainties related to Britain’s exit from the European Union, and economic conditions in emerging market countries.
Looking at the Korean economy, exports have remained on their trend of decline but domestic demand activities including consumption appear to have continued their albeit moderate improvements. The sentiments of economic agents have meanwhile improved slightly. On the employment front, as the number of persons employed has increased, the employment-to-population ratio rose and the unemployment rate fell in July compared to those in July of last year. The Board forecasts that the domestic economy will sustain its trend of modest growth going forward, owing chiefly to expansionary macroeconomic policies, but in view of economic conditions domestically and abroad judges the uncertainties surrounding the growth path to be high.
Consumer price inflation fell from 0.8% the month before to 0.7% in July, in line mainly with a slowdown in the rate of increase in service fees. Core inflation excluding agricultural and petroleum product prices also declined to 1.6%, from 1.7% in July. In the housing market, sales and leasehold deposit prices showed low rates of increase. Looking ahead the Board forecasts that consumer price inflation will remain at a low level for the time being, and then gradually rise as the effects of the low oil prices diminish.
In the domestic financial markets since July, stock prices have risen and the Korean won has appreciated to a large extent against the US dollar, as foreigners’ securities investment funds have shown net inflows owing chiefly to expectations of monetary policy easing in major countries. The won has meanwhile appreciated against the Japanese yen, in line with the won’s relative strengthening. Long-term market interest rates have shown slight fluctuations at low levels. Household lending has sustained a trend of substantial increase at a level exceeding that of recent years, led by mortgage loans.
Looking ahead, the Board will conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation approaches the target level over a medium-term horizon, while paying attention to financial stability. In this process it will closely monitor the trend of increase in household debt, any changes in the monetary policies of major countries, and the progress of corporate restructuring."