BOK raises concerns over household debt

They held rates steady at 2.00%, as a result.

No substantial change was observed in the policy statement yesterday.

According to the governor of the Bank of Korea, the BOK kept rates steady because of the sharp increase in household debt.

A report by DBS says that with regard to the recent easing by global central banks and the fluctuations in exchange rates, the governor said that the BOK is closely monitoring the movements of the euro and the yen, and pointed out that the won has become slightly overvalued on the REER basis.

Regarding the broad economic outlook, he continued to express the concerns that growth recovery is not strong and downside risks are in place.

Here’s more from DBS:

The BOK’s assessment of a weak economic recovery bolsters the case of rate cuts this year. Its discomfort over the won’s strength also suggests that it may step up interventions and/or cut rates, in the event of further monetary easing by global central banks and rising pressures on the KRW REER.

At present, however, the bias is for the BOK to stay on hold. Bank lending to the household sector has accelerated further to 8.7% (YoY) in Jan15, up from 8.1% in Dec14. Heightened concerns over household debt expansion will likely keep the BOK from slashing rates in the immediate term.

All in, we continue to expect a 25bps rate cut for this year. The timing of the rate move in our forecast, however, has been pushed back to 2Q15 from 1Q15.

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