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South Korea’s central bank is prioritising financial stability as the country grapples with increasing household debt and a slowdown in inflation. Despite inflation moderating to below 3% in recent months, the Bank of Korea (BOK) has chosen to hold interest rates steady, emphasizing the need to manage growing financial risks.
Household debt in South Korea has surged to over 100% of the country’s GDP, one of the highest levels among advanced economies. This rapid increase in borrowing, particularly through mortgages and personal loans, has raised concerns about the potential strain on households if economic conditions worsen or interest rates rise.
BOK Governor Rhee Chang-yong stressed the importance of preventing further financial instability during a recent press briefing. “Household debt remains a significant risk to our economy,” Rhee said, adding that managing this debt is critical to safeguarding the country’s long-term economic health.
The decision to maintain interest rates comes as inflation has eased from the high levels seen in 2022, driven by lower global energy prices and cooling domestic demand. South Korea’s inflation rate stood at 2.3% in July, marking a significant drop from the previous year’s highs. However, even as inflation subsides, the central bank faces the challenge of balancing economic growth with the need to stabilize the financial system.
Experts have voiced concerns that without further policy intervention, rising household debt could weaken the economy’s resilience to future shocks. With interest rates already elevated to curb inflation, there are fears that any further tightening could push highly indebted households into default, which could destabilize the banking sector and slow down economic growth.
Bank of Korea is expected to continue its cautious approach, focusing on curbing excessive borrowing while keeping a close eye on inflation trends. The central bank has indicated that any future rate hikes will depend on the trajectory of both inflation and household debt, underscoring the delicate balancing act it faces in ensuring financial stability.