Vivek Maishra

BENGALURU (Reuters). South Korea’s central banks will not raise rates on Tuesday. However, they will prepare for a rise next month following the August increase. The reason behind this is high household debt and a volatile housing market that threaten financial stability. A Reuters poll revealed.

Koreans have borrowed more than ever before, and policymakers are becoming increasingly concerned that rising property prices could be a danger to the recovery of the economy last year.

Nearly all of the economists polled by Reuters between Oct. 1-7 said that the BoK will keep the base rate at 0.75% Tuesday, after hiking in August for the first time since almost three years. In the short term, downside risks to the economy have been raised by a recent increase in COVID-19-related cases in various parts of the country.

However, 23 percent of the 29 polled respondents expected an increase at the November meeting. This would raise the benchmark lending rate by 1.00%.

Krystal Tan (an economist at ANZ) stated that the BoK would keep its policy rate at hold next week, but signal its intention to normalise its policy further… in order to mitigate financial instability risk arising out of rising house prices, high household credit growth, rather than inflation which is forecast to ease next year.

The government will announce additional measures to reduce household debt this month. This could include tighter regulations on home-backed loans. The BoK should be cautious as financial concerns and economic recovery must both be considered.

South Korea would be ahead of all other central banks with developed economies if the central bank decides to raise rates in November. This is in contrast to New Zealand which increased its rates on Wednesday for the first time since 2007.

The majority of economists think there’s more tightening ahead and expect the interest rate to reach 1.25% by next year. The median estimate from a small group of economists suggested a further 25 basis-point increase to 1.50%.

The central bank of South Korea also stated that it will continue tightening policy as long as there are inflationary pressures.

While inflation fell slightly to 2.5% in September from the previous month, it was still above the central bank’s target of 2% for the sixth consecutive month.

According to poll, it is projected to be 2.1% in 2018, falling to 1.6% next and 1.7% by 2023.

Alex Holmes from Capital Economics, Asia economist said “Inflation has been driven mainly by high food prices as a result of weather disruption and bird flu epidemic.” These temporary factors will begin to unwind over the next months and the Bank of Korea’s target of 2% by 2022 should see the headline rate drop.

But, the chances of growth this year are dimmed due to the revival of COVID-19. The second quarter saw South Korea’s economy expand 6.0%. This was the highest annual rate in 10 years. It is due to an increase in private consumption.

The poll revealed that the fourth-largest Asian economy saw its growth slow to 4.2% during the September quarter. It will drop to 4.1% this quarter.

Following a decline of 4.0% last year, the forecast for growth this year is at average 4.0%. It is forecast to increase to 3.0% in the next year, and 2.6% by 2023.

(For additional stories on the Reuters global economy poll, click here