Roundup: South Korea raises interest rate to 1.5 pct in 6.5 years

SEOUL, Nov. 30 (Xinhua) -- South Korea's central bank on Thursday raised its benchmark interest rate by a quarter percentage point to 1.5 percent, the first tightening of monetary policy in almost six and a half years.

Bank of Kora (BOK) Governor Lee Ju-yeol and six other monetary policy board members decided to lift the seven-day repurchase rate to 1.50 percent from an all-time low of 1.25 percent.

The bank ended the 17-month rate freeze, raising the benchmark rate for the first time since June 2011. The BOK lowered its policy rate from 3.25 percent in July 2012 to 1.25 percent in June last year to tackle the global economic slump.

Governor Lee indicated a rate increase in June amid exports recovery and record-breaking household debts, but it was delayed on mounting geopolitical risks on the Korean Peninsula, caused by the Democratic People's Republic of Korea (DPRK)'s sixth nuclear test in early September.

The DPRK on Wednesday test-fired Hwasong-15, which it described as a newly developed intercontinental ballistic missile (ICBM), but the BOK tightened its monetary policy as the geopolitical risks had little impact on the domestic financial market.

South Korea's economy showed signs of recovery as seen in recent economic indicators. Exports, which account for about half of the economy, continue to rise, while the real gross domestic product (GDP) advanced 1.4 percent in the third quarter from the previous quarter.

The International Monetary Fund (IMF) revised up its 2017 growth forecast for South Korea's economy to 3.2 percent, setting the 2018 outlook at 3.0 percent. It was higher than the economy's growth potential, estimated at a range of 2.8-2.9 percent.

Confidence among South Korean consumers over economic situations surged in October to the highest in nearly seven years.

Higher borrowing costs would shrink the growth rate of household debts, which had maintained a record-breaking momentum until recently amid the record-low borrowing costs.

However, the rate hike heralded higher lending rates, which would increase debt-servicing burden for households, especially those in the low-income, low-credit bracket.

The so-called marginalized companies, which are incapable of repaying even debt interests, were forecast to face a very hard time in surviving amid the higher lending rates.

Despite the expected side effects, the central bank had no choice but to tighten its monetary stance as a prolonged low rate could increase moral hazard among households and encourage them to purchase new home with borrowed money.

The marginalized companies needed to be restructured given that the firms were unable to earn profits necessary to repay debt interests.

The government unveiled a set of programs to help households suffering from massive debts refinance debts with a lower rate and a longer maturity.

The BOK's future rate increase would come in a gradual manner as one of the seven-member policy board opposed the rate hike during this month's rate-setting meeting.

Governor Lee told a press conference after the meeting that further rate hikes would be cautiously decided upon though the South Korean economy was expected to expand around 3 percent next year. Enditem