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BoK to hold fire but hike next month to mitigate high debt risk: Reuters poll

BoK to hold fire but hike next month to mitigate high debt risk: Reuters poll

FILE PHOTO: The logo of the Bank of Korea is seen on the top of its building in Seoul, South Korea, July 14, 2016. REUTERS/Kim Hong-Ji/File Photo

BENGALURU : South Korea's central bank will keep rates unchanged on Tuesday but will set the stage for a rate hike next month to follow the August rise, as high household debt and a red-hot housing market threaten financial stability, a Reuters poll found.

Koreans have been borrowing more than ever before and policymakers are increasingly worried skyrocketing property prices have become a risk to the economy, which has recovered strongly from last year's recession.

After hiking for the first time in almost three years in August, nearly all economists in an Oct. 1-7 Reuters poll said the BoK would keep its base rate unchanged at 0.75per cent on Tuesday. A recent rise in COVID-19 cases around the country has raised downside economic risks in the short-term.

But 23 of 29 respondents polled expected a hike at the November meeting, taking the benchmark lending rate to 1.00per cent.

"The BoK (will) keep its policy rate on hold at its meeting next week but signal its intent to normalise policy further ... to mitigate financial instability risks arising from rising house prices and high household credit growth rather than inflation, which is expected to ease next year," said Krystal Tan, an economist at ANZ.

"With the government is set to announce more measures to curb household debt later this month, including potentially tighter rules on home-backed loans. There is a stronger case for the BoK to proceed cautiously, as concerns over financial imbalances need to be balanced with the economic recovery."

If the central bank delivers a rate hike in November, it would put South Korea well ahead of most other developed economy central banks in the current global tightening cycle, including New Zealand, which raised rates for the first time in seven years on Wednesday.

Most economists agree there is more tightening coming and see the interest rate reaching 1.25per cent by the end of next year. Looking further out into 2023, the median from a smaller sample of economists pointed to another 25 basis point hike to 1.50per cent.

South Korea's central bank also reiterated it would continue to tighten policy as inflationary pressures persist.

Inflation eased slightly in September to 2.5per cent but remained above the central bank's 2per cent target for a sixth straight month.

It is expected to average 2.1per cent this year, slipping to 1.6per cent next year and 1.7per cent in 2023, according to the poll.

"The main driver of inflation in recent months has been higher food prices due to disruption from the weather and a bird flu outbreak," said Alex Holmes, Asia economist at Capital Economics. "These temporary factors should unwind in the coming months, and we expect the headline rate to drop back to the Bank of Korea's 2per cent target by early 2022."

However, a resurgence of COVID-19 casts doubts over the outlook for growth for the rest of the year. South Korea's economy expanded 6.0per cent, the fastest annual pace in a decade, in the second quarter thanks to a pick up in private consumption.

But growth in Asia's fourth-largest economy likely slowed to 4.2per cent in the September quarter and will fall to 4.1per cent in the current quarter, the poll showed.

Growth is forecast to average 4.0per cent this year after shrinking for the first time in over two decades last year. But it is expected to ease to 3.0per cent next year and then to 2.6per cent in 2023.

(For other stories from the Reuters global economic poll)

(Reporting by Vivek Mishra; Polling by Devayani Sathyan and Md. Manzer Hussain; Editing by Ross Finley and Edmund Blair)

Source: Reuters

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