S. Korea's monetary policy in dilemma after Yellen's comments

South Korea's central bank fell into a deeper dilemma after U.S. Federal Reserve Chair Janet Yellen's comments indicated a rate hike within this year.

Bank of Korea (BOK) Governor Lee Ju-yeol said at a meeting with economic experts Tuesday that the central bank cannot help but closely monitor the movements in the global financial market after Yellen's comments hinted at the rate hike within this year.

Yellen said in a speech in Rhode Island Friday that "it will be appropriate at some point this year to take the initial step to raise the federal funds rate," suggesting the first rate hike from near zero since the 2008 financial crisis.

Her comments led to the ascent of the U.S. dollar to major currencies, interpreting the Fed's rate hike this year as a foregone conclusion. Many market watchers predicted the Fed's first rate increase in September this year.

Governor Lee had maintained a stance "in principle" that the BOK should not necessarily follow the Fed's rate hike nor necessarily raise its own interest rate from an all-time low of 1. 75 percent.

The BOK cut the benchmark interest rate to 1.75 percent in March, after lowering it by 25 basis points in August and October last year respectively.

Politics in South Korea still placed a burden of stimulating the lackluster economy on the BOK. Finance Minister Choi Kyung- hwan told reporters at a forum Tuesday that he had a similar thought with the state-run think tank Korea Development Institute (KDI) about the BOK's monetary policy.

The KDI warned last week that South Korea's economic growth may fall below 3 percent in 2015 unless structural reforms are conducted as planned, tax revenue meets expectations and policy rates are cut once or twice.

Choi said the BOK would consider the KDI's assessment in setting the policy rate, putting pressures on the bank indirectly to cut rates further.

Though the Fed would begin raising its interest rate in September as expected, the BOK is not likely to follow suits as the BOK's rate hike would increase debt-servicing burden for households.

Household debts in South Korea, especially mortgage loans, recently increased at a rapid pace amid the record-low interest rates and eased regulations on mortgage financing.

The ratio of household debts to disposable income was 160.7 percent as of 2013, higher than an average of 135.7 percent among OECD member countries.

However, the prolonged interest rate at a record low in South Korea would increase household debts further and become a starting point to housing bubble, driving the BOK into a deeper dilemma in managing monetary policy. Endi