The Bank of Korea (BOK) on Thursday decided to keep the policy interest rate steady at record-low of 1.25 percent for August, reflecting policy bind amid ballooning household debt and growingly unfavorable external conditions.

The central bank in June lowered the base rate to a fresh low of 1.25 percent from 1.5 percent, and the market expects another cut within the year if fiscal stimuli including supplementary budget fail to aid recovery and also sync with other developed economies that have been expanding or accelerating monetary losing amid renewed signs of recession.

Although Korea has room to bring down the base rate further, given the gap with U.S. interest rates around zero percent even when the U.S. Federal Reserve renews its campaign of normalizing rates, the central bank cannot easily do so as loose liquidity has ended up worsening household debt level.

Despite stricter regulation on mortgage-backed loans, bank loans to consumers surged 6.3 trillion won ($5.7 billion) in July alone, of which 5.8 trillion won was mortgage-backed loans although housing trade is usually idle in summer.

The colossal household debt is feared as the potentially biggest danger to the Korean economy if interest rate burden increases from higher U.S. interest rates.

“It is not desirable for household debt to keep on rising for a lengthy period. We would have to come up with measures,” said BOK Governor Lee Ju-yeol in a press conference after monetary policy committee meeting. “Authorities are keeping a close watch on household debt and we are coordinating actions,” he said without specifying.

The government hopes to inject public funds of 28 trillion won including a supplementary budget of 11 trillion won in the second half to prop up the economy amid ongoing restructuring in ailing companies and industries and uncertainties on the global front due to British decision to exit the European Union.

Adding to woes on the external front, the U.S. dollar lost grounds, sinking below 1,100-won threshold on Wednesday for the first time in 13 months on weak U.S. data.

The Korean composite stock price index closed Thursday at 2,040.98 points, down 3.66 points or 0.18 percent from the previous session.

By Lee Sang-duk

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]