In a widely expected move, South Korea's central bank on Friday left its benchmark interest rate unchanged for a second straight month in May, citing expectations for an economic recovery and soaring household debt.
In the monthly rate-setting meeting, the Monetary Policy Committee of the Bank of Korea (BOK) decided to hold the base rate steady at a record low of 1.75 percent. One of the seven board members voted for a rate cut.
While sustaining its view that "the economy will show a modest trend of recovery going forward," the committee noted in a statement that household lending at banks had increased "at a level substantially exceeding that of recent years."
Confidence among domestic economic players is on the mend, despite a steady downturn in exports and fluctuations in indicators related to domestic demand, it added.
"There is a need to wait and see whether signs of recovery, such as an improving asset market and consumer sentiment, will continue," BOK Gov. Lee Ju-yeol told reporters in a press conference.
"The recent increase in household debt growth and increased volatility in the global financial market were other factors we comprehensively considered for the decision."
The local property market is seen to be on a recovery track as potential home buyers are increasingly opting to borrow amid low interest rates.
Apartment transactions in Seoul reached 13,900 units last month, nearly double the average of 7,200 transactions in the month of April between 2006 and 2014. Prices of apartments also gained 0.6 percent on-month in April.
Citing indexes gauging consumer and business sentiment, the top central banker also highlighted an improvement in economic players' confidence in the economy.
The consumer sentiment index reached 104 last month, up from 101 posted in March, while the business sentiment index of manufacturers reached 82 for May, compared with 80 for April, according to BOK data.
Such improvements, however, have also stoked concerns over the country's already-bulky household debt as more people borrow to purchase houses. Outstanding household loans extended by local lenders increased to a record 8.5 trillion won (US$7.8 billion) in April.
"While the size of household debt is manageable, the recent pace of its growth is quite fast. We plan to cooperate with the financial regulator and the finance ministry to solve this problem," said the BOK governor.
Lee voiced concern over sluggish exports, which some economists have pointed out as a potential factor that can prompt an additional rate cut.
South Korea's exports sank 8.1 percent in April from a year earlier, worsening from a 4.3 percent on-year drop in March.
But the BOK governor distanced himself from such anticipation, stressing that more efforts to overcome structural issues, such as local exporters' weakening competitiveness against their overseas rivals that are quickly catching up in technology, are important.
The freeze was in line with a poll by Yonhap Infomax, the financial news arm of Yonhap News Agency. A whopping 12 out of 13 analysts had forecast the BOK to stand pat on the rate to further monitor economic indicators and growing household debt.
"The BOK sustains its view that the economic recovery will start gaining traction in the second quarter. Moreover, rapid household debt growth will not lead to an immediate rate cut," said Lim Noh-joong, an analyst at I'M Investment & Securities Co., ahead of the decision.
Economists were mixed on the prospect of an additional rate cut later in the year, especially after the BOK head reiterated the policy board's stance on being "data-dependent."
"He hinted at neither a rate freeze nor a cut. What was notable was his optimism that the economy is on a modest recovery track, while still noting that exports may be downbeat," said KB Investment & Securities Co. economist Kim Myoung-sil, forecasting a rate freeze until the end of the year.
In a separate poll by Yonhap Infomax, seven out of 13 analysts projected an additional rate cut as early as June, citing the need to further boost economic growth.
The central bank has delivered three rate cuts by a total of 0.75 percentage point over the last 10-month period, most recently in March, to shore up growth in Asia's fourth-largest economy. In its latest economic outlook updated on April 9, the BOK trimmed its annual growth forecast to 3.1 percent from 3.4 percent.
Asia's fourth-largest economy has been facing economic headwinds as the recovery remains weak despite policy efforts, including rate cuts.
In the first quarter, the Korean economy expanded 0.8 percent on-quarter, picking up from a 0.3 percent growth three months earlier. On-quarter growth, which reached 1.1 percent in the first quarter of last year, slowed to 0.5 percent in the second quarter and fell to 0.3 percent in the fourth quarter after slightly picking up to 0.8 percent in the third quarter. (Yonhap)
