South Korea sees rates rise as financial risks rise

SEOUL, Aug.24 (Reuters) – South Korea is expected to raise interest rates on Thursday, making it the first major central bank in Asia to do so in the era of the pandemic as debt surges household and house prices threaten financial stability.

However, the move could be a close call with just 16 of 30 analysts polled by Reuters expecting the Bank of Korea (BOK) to raise its base rate (KROCRT = ECI) by 25 basis points to 0.75. %, while the remaining 14 see the bank holding it unchanged at all-time low.

If it hikes rates this week, South Korea will become the first major economy in Asia to begin normalizing accommodative monetary policy even as the country struggles to contain the spread of the coronavirus outbreak.

With only three meetings before the end of the year, 14 of the 22 analysts who gave forecasts at the end of 2021 only see the bank rise once, while the other eight see it once more.

“The BOK is worried about the build-up of financial imbalances since May … (therefore) it will take a political decision with more weight on financial stability than on economic fundamentals,” said Woo Hye-young, securities analyst fixed income at eBest Investment & Securities.

“Although the economy is under constant pressure from the resurgence of COVID-19, it is expected to grow over 4% for this year,” said Kong Dong-rak, economist at Daishin Securities, reducing the possibility of a rate freeze.

Bank lending to households increased by 9.7 trillion won ($ 8.32 billion) last month alone, accelerating even after the government began to impose new limits on bank lending in July.

Meanwhile, Koh Seung-beom, a BOK board member and now new head of the Financial Services Commission, last week pledged to slow debt growth, saying debt management household is its top priority.

South Korea has been battling record-breaking coronavirus infections in recent weeks, even under the most stringent restrictions imposed on Seoul and neighboring areas. Only 23.9% of the 52 million inhabitants were fully vaccinated Monday at midnight.

In the same poll, the 18 analysts who gave forecasts at the end of 2022 see the central bank hike 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%. We see it at 1.50%.

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

($ 1 = 1,166.5,000 won)

Reporting by Joori Roh, Jihoon Lee and the Bangalore Poll Team; Editing by Sam Holmes

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