February 8, 2018 / 3:09 AM / a year ago

South Korea to keep rates accommodative, says debt dragging on consumption

A man gets on a bicycle in front of the Bank of Korea in Seoul August 9, 2012. REUTERS/Kim Hong-Ji/File Photo

SEOUL (Reuters) - South Korea’s central bank said on Thursday it would keep interest rates accommodative for now because inflation is tepid and consumers are saddled with record household debt.

“Growth is likely to hover around the economy’s potential growth rate,” the bank said in a quarterly monetary policy report. “Having said that, consumption recovery may be slower than it was in the past due to the growing debt repayment burden among other reasons.”

The central bank said the contribution of exports to gross domestic product was likely to rise while private consumption’s would fall because of the debt burden. Private consumption accounted for about 46 percent of GDP in 2016.

Thursday’s comments reinforced the likelihood of the BOK keeping interest rates KROCRT=ECI on hold at the current 1.50 percent for longer after a widely expected 0.25 percent point hike in November 2017.

At 1,419.1 trillion won ($1.31 trillion), South Korea’s household debt is at about 190 percent of GDP, forcing consumers to spend less on items such as food and clothes - weighing on economic growth.

Still, the bank believes a sharp improvement in exports and recovering investment will spur growth this year with global demand for South Korean memory chips and petrochemical products expected to stay robust.

South Korea’s annual inflation eased to 1.0 percent in January, the slowest in 17 months.

Reporting by Cynthia Kim; Editing by Eric Meijer

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