Photographer: SeongJoon Cho/Bloomberg

Tide Turns on Rate Cuts in South Korea

  • Lawmakers are now highlighting negative impact of low rates
  • Most analysts see no change in rate when BOK meets Thursday

South Korean lawmakers have done an about-face on interest rates. With benchmark borrowing costs at a record low and households piling on debt, they’re cautioning the Bank of Korea to show restraint rather than make another cut at the policy board’s meeting on Thursday.

This is different from 2015 and 2014, when elected officials were more concerned about lowering borrowing costs to support the economy and weaken the currency than the risk of a debt bubble. It’s also in contrast to many other emerging economies, including India, where the new central bank governor -- after politicians’ urging -- unexpectedly lowered rates this month.  

Analysts who watched lawmakers quiz Governor Lee Ju-yeol during a parliamentary hearing in Seoul last week said that while the BOK is independent, political pressure for now weighs against taking the benchmark rate any lower than the current 1.25 percent. Only one of 18 economists surveyed by Bloomberg forecast a cut on Thursday.

“Both ruling and opposition party lawmakers questioned the effect of previous rate cuts, and raised concern over rising household debt,” said Chang Jae-chul, a Seoul-based economist for Citibank Korea Inc. These were early "warnings" ahead of the presidential election campaign due next year that debt could become an issue of political responsibility.

Household debt rose to a record 1,257.3 trillion won ($1.1 trillion) as of end-June. That’s 11 percent higher than 12 months earlier and reflects a surge in loans in recent years as the government eased mortgage rules and the central bank made borrowing cheaper. While the measures brought a property boom that’s softened the blow to the economy of a drop in exports, debt has reached levels that hurt consumption and many people are priced out of the housing market.

In the parliament’s annual audit of the Bank of Korea on Oct. 4, ruling party lawmaker Choo Kyung-ho suggested putting a cap on household loans by commercial banks. Kim Hyun-mi of the main opposition party said rate cuts had put people in debt while failing to boost economic growth.

Minutes of the BOK board’s meeting on financial stability released Tuesday showed that members were concerned about the rising level of credit relative to total gross domestic product. One member called for closer look at risk factors, noting that a crisis can evolve in unexpected ways, as can be seen from little concern over the U.S. housing market before the global financial crisis.

After lowering hurdles to property purchases on credit, President Park Geun-hye’s administration also introduced measures to protect borrowers, including a push to amortized loans instead of ones that allow interest rate-only payments before the principal comes due.

Loan Demand

These measures haven’t curbed loan demand and the government seems to be reluctant to tighten loan-to-value or debt-to-income ratios, Kwon Young-sun, an economist at Nomura International in Hong Kong, wrote in a report on Oct. 6.

That of course puts the onus back on the central bank to help control things by not taking interest rates lower.

Stephen Lee, an economist for Samsung Securities in Seoul, said he sees alignment among members of parliament, the Park administration and the central bank about the risks posed by household debt.

“There also seems to be rising doubts about how far you can go in using the construction boom to support the economy, and how beneficial that is for the general public,” said Lee.

The Bank of Korea is expected to announce any changes to its benchmark rate around 10 a.m. in Seoul on Thursday.

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