BoK likely to maintain policy rate at 1.25 pct, seeking to balance between financial stability and economic growth: Scotiabank

The Bank of Korea (BoK) is expected to leave its policy rate unchanged at 1.25 percent at its monetary policy meeting, scheduled to be held on Thursday morning, seeking a balance between the nation’s financial stability and economic growth. Local media Yonhap News reported Wednesday that Korea's growing household debt and geopolitical risks are two major systemic risks facing the country's financial system, citing a semiannual survey conducted by the BoK.

Korean household debt rose 1.28 percent to a record high of KRW1,359.7 trillion as at end-Q1 from KRW 1,342.5 trillion a quarter earlier, partly due to increasing lending by non-bank financing corporations. The indebtedness has weighed on Korea’s private consumption, while posing growing risks to the nation’s financial system.

In addition, Finance Minister nominee Kim Dong-yeon has reaffirmed fiscal expansion to increase jobs, income and growth. He said Sunday that expansionary fiscal policy seems to be appropriate under the current circumstances to tackle the pressing tasks such as low economic growth and high youth unemployment rate, according to Yonhap News.

Kim agreed with President Moon Jae-in's plan to draw up a supplementary budget worth KRW 10tn in the second half. The BoK’s monetary policy stance may turn slightly hawkish in the months ahead on the planned fiscal spending.

"We believe it will be supportive of the KRW in the medium term together with expansionary fiscal policy. The KRW ND IRS curve is now factoring in a 5 basis points rate hike within six months," Scotiabank reported in its latest research report.