Bank of Korea Governor Rhee Chang-yong said any potential widening of the Mideast conflict that spurs oil prices sharply higher could weigh on the bank’s growth forecast, but it’s too soon to gauge the impact at this point.
(Bloomberg) — Bank of Korea Governor Rhee Chang-yong said any potential widening of the Mideast conflict that spurs oil prices sharply higher could weigh on the bank’s growth forecast, but it’s too soon to gauge the impact at this point.
“If this issue will go beyond regional and across the whole Arab region, then that’ll have a large impact,” Rhee told Bloomberg TV’s Francine Lacqua in an interview Thursday.
For now it’s still “premature” to judge the impact of the Israel-Hamas conflict on oil prices due to the limited size of economies involved.
The BOK bases its projection of 2.2% economic growth next year on the premise that the global oil price will stay around the mid-$80 range, and Korea will be “relatively immune” if that proves to be the case, he said. The price of WTI was just above $83 per barrel as Rhee spoke, while Brent was a little under $86 per barrel.
“If the oil price goes well above that, we’ll probably have to revise our growth rate,” he said.
Rhee spoke on the sidelines of the meetings of the International Monetary Fund and World Bank in Morocco, where global central bankers discussed their views on inflation amid sundry risks including real estate bubbles and China’s slowing economy.
On the domestic front, Rhee said authorities have managed to achieve a “soft-landing” in the Korean property market to some extent, after they took action to defuse a series of credit threats ranging from the default by a Legoland Korea developer to a crisis that devolved into a bank run at a local credit union.
A steep correction in the housing market that began last year stirred jitters in Korea after the BOK raised its benchmark interest rate quickly to keep up with the Federal Reserve’s faster-than-expected tightening.
The government has implemented a series of steps to shore up the construction industry and now there is growing concern that a bubble may form again in the housing market.
Household debt is bouncing back, adding to factors prompting the BOK to retain its tightening bias and dismiss any talk of an early easing. The nation’s ratio of household debt-to-gross domestic product stood at 105% as of last year, according to the IMF.
“Our household debt above 100% is not desirable,” Rhee said. “We have to make it decline slowly.”
Rhee spoke a week before the BOK meets for another rate decision. Analysts say the board is likely to keep its rate at a restrictive level of 3.5% as household debt levels figure high in the minds of board members.
“The most important issue for the BOK at the moment is household debt,” said Kim Sung-soo, a fixed-income analyst at Hanwha Investment & Securities Co. He expects a hold at next week’s rate meeting.
The board has made it clear that it will keep its options open for another rate hike as it seeks to confirm that inflationary pressures are well under control, echoing efforts by global central bankers to keep a lid on prices.
The Federal Reserve in particular has signaled that the US benchmark is likely to remain high for longer than previously thought, although bets on another hike have receded recently after commentary by some officials softened somewhat.
Further policy tightening by the Fed would put more pressure on the BOK to consider hiking to shore up the local currency against the dollar and help ease the burden of higher costs related to the food and energy imports that Korea relies on.
The BOK started its rate-hike cycle in August 2021, leading a pack of monetary authorities embarking on tightening cycles as their economies recovered from the pandemic. Since the last increase in January, the BOK has refrained from tightening further as the economy was hit by weaker external demand.
–With assistance from Whanwoong Choi.
(Updates with more comments throughout)
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