S.Korea central bank says coordinated efforts needed to deal with household debt

SEOUL (Reuters) – South Korea’s central bank said on Thursday it needs to make coordinated efforts to contain household debt, which is at levels that could undermine economic growth and financial stability.

“Unlike in major countries, household debt increased continuously without de-leveraging and has reached a level that hinders macroeconomic and financial stability,” the Bank of Korea (BOK) said in its quarterly monetary policy report.

“As financial imbalance must be managed below a certain level for stable growth in the mid- and long-term, it is necessary to continue making steady efforts for adjustment,” the BOK said.

South Korea’s household borrowing grew for a fifth straight month in August by the biggest amount in two years, driven up by rising mortgage demand, prompting financial authorities to tighten certain loan regulations.

The BOK said in the report it was more effective for macro-prudential policy to coordinate with monetary policy than for policy responses to be made in isolation.

South Korea’s house prices, which snapped a 13-month decline in July, are “still over-valued” when compared with income and other economic factors, the BOK said.

Despite a slowdown in household debt growth during the latest monetary tightening cycle, the ratio to nominal gross domestic product (GDP) is still high, according to the BOK, “far surpassing” the threshold at which its negative impact on growth increases.

Central bank policy board members kept the door open for further rate hikes at their review in August, at which it kept interest rates unchanged, but they also flagged increased risks to economic growth, meeting minutes showed this week.

(Reporting by Jihoon Lee; Editing by Sam Holmes)