Bank of Korea, June Monetary and Credit Policy Report
"Current Base Rate Slightly Exceeds Neutral Rate"
The Bank of Korea diagnosed that domestic housing prices are still overvalued, deviating from income levels. Despite a recent decline, the household debt ratio remains high, indicating that the accumulated financial imbalances have not yet been resolved.
On the 8th, through the 'Evaluation of the Current Monetary Policy Stance and Major Risk Assessment' included in the Monetary and Credit Policy Report, the Bank of Korea stated, "Due to the government's regulatory easing and other factors, the decline in housing prices has rapidly slowed this year, and household loans by banks, mainly related to housing, have increased again, so attention should be paid to the possibility of delayed household debt deleveraging."
The Bank of Korea assessed the current base interest rate as a tight level slightly exceeding the neutral rate range. However, judging by market interest rates, considering the rapid decline in short- and long-term government bond yields this year, it is estimated that the degree of tightening has significantly eased. Looking at the Financial Conditions Index (FCI), financial conditions continue to be tight, mainly due to adjustments in asset prices such as housing prices and stock prices caused by interest rate hikes.
However, the Bank of Korea emphasized that potential risks such as ▲high uncertainty of inflation ▲possibility of delayed resolution of financial imbalances ▲possibility of instability in the foreign exchange sector ▲possibility of recurrence of financial instability could act as constraints on monetary policy operations, so appropriate policy management considering these factors is necessary.
First, various core indicators showing underlying inflationary pressure remain high and downwardly rigid, indicating high uncertainty about the speed of future inflation decline.
Also, amid a continued current account deficit, if the U.S. Federal Reserve (Fed) raises interest rates further or domestic monetary policy stance shifts early, upward pressure on the exchange rate may increase again. It is necessary to note that if the current account improvement is delayed, downside risks to growth and risks of foreign exchange supply-demand imbalance will increase, potentially weakening confidence in external soundness.
Furthermore, the possibility of recurrence of financial instability cannot be ruled out. Although the likelihood of financial instability caused by expanded liquidity risks across the market, as in the second half of last year, is low, there is a latent risk that credit risks related to real estate finance, centered on non-bank financial institutions, may spread to other sectors and market instability amid high interest rates.
In addition, since the second half of last year, the delinquency rate on corporate loans of non-bank financial institutions with a high proportion of real estate industry loans has rapidly increased, and credit caution continues regarding securities firms and construction companies with high exposure to project financing (PF) securitized bonds.
The Bank of Korea added, "In the bond market, supply-demand burden factors such as large-scale maturity of bank bonds until the end of the year, additional issuance of mortgage-backed securities (MBS) due to early exhaustion of special home mortgage loans, and government bond issuance due to poor tax revenue performance persist," and warned, "It is necessary to be cautious about the possibility that these burdens may concentrate at once, leading to weakened investor sentiment, accumulation of non-investment grade bonds, and deterioration of liquidity conditions."
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