MNI STATE OF PLAY: Bank Of Korea To Hold On Economy Concerns

Benchmark interest rates will likely be kept steady at 0.75% by the Bank of Korea next week as it shows caution amid an economic slowdown in neighbouring China, though the stance is seen as more of a pause, MNI understands.

The BOK hiked rates by 0.25% in August on a cautious path amid financial imbalances and continues to monitor rising house prices and inflation.

But the focus is shifting to whether evolving risks to the economy and inflation would lead the the BOK to hike at the Nov. 25 policy-setting meeting.

Private economists too expect exports to slow in the fourth quarter on the back of ongoing supply restrictions and a slowing Chinese economy.

Also see: MNI INTERVIEW: Bank Of Korea To Hike Rates-SMBC Nikko Economist.

The impact of debt repayment delays by China Evergrande Group and other property developers has sown caution on the wider economic outlook for China, leading the source to suggest "bank officials will not raise the policy rate this month," a person who is familiar with South Korea economy and monetary policy said.

ECONOMY OUTLOOK

The South Korea economy continues to be led by solid exports on global demand for IT-related goods amid weak domestic demand as Covid-19 infection rates persist higher

Exports rose 16.7% y/y in September for the 11th straight rise, the best performance since 1956 when trade data was first published.

"The South Korea economy will continue to be supported by firm overseas demand," the source said.

FINANCIAL IMBALANCES

Concerns over financial imbalances however are increasing amid a prolonged easy policy, with August the first rate hike since November 2018.

BOK Chairman Lee Juyeol has said that the bank should normalise its monetary policy in an appropriate timing if the economy continues recovering.

The South Korea financial authority has warned of the increase of commercial banks' loans, which aren't consistent with economic conditions, and of the risk that those loans could turn to non-performing loans. The authority urged commercial banks to implement strict risk management.

The BOK has touched on this aspect of the economy as well. "Household loan growth has accelerated, and house prices have continued to increase rapidly in all parts of the country," the BOK said.