South Korean Prime Minister Lee Nak-yon urged the Bank of Korea to raise key interest rate Thursday, citing concerns about financial instability.

“Without a rate hike, problems related to capital flight, a widening gap in interest rates between Korea and the United States and the (upward) pressure on (the level of) household debt will persist,” said Lee. “It is high time to take this matter more seriously.” 

Lee also blamed expansionary monetary policy during the former Park Geun-hye administration for the faster pace of household debt growth. The BOK during ex-president Park‘s tenure began to drop the key rate starting in August 2014 to a record-low 1.25 percent in June 2016. Meanwhile, the volume of household loans began to surge about 10 percent on-year starting 2015, compared to the previous three years when it rose around 6 percent, according to data from the Bank of Korea.

Bond markets responded to the hawkish remarks. Korea‘s three-year sovereign bond yield rose 28 basis points in the session’s close, compared to Wednesday when it hit the lowest this year at 1.893 percent.

The remarks came a few weeks after the BOK stressed neutrality in a monetary board’s decision.

A Cheong Wa Dae official, who declined to be identified, told reporters on Aug. 21 that the BOK “should come up with the policy regardless of US Federal Reserve rate hikes.” The same day, a three-year sovereign bond yield fell 66 basis points.

BOK Gov. Lee Ju-yeol called such remarks by the official “inappropriate,” as they make an impact on the market and undermine neutrality in monetary policy decision, in a press briefing on Aug. 31 after its decision to freeze the rate at 1.5 percent for nine consecutive months in August.

The central bank in August cited larger-than-expected global trade war threats and government’s supplementary budget in part due to sluggish jobs reading.

By Son Ji-hyoung 
(consnow@heraldcorp.com)