According to the central bank of South Korea, actively managing financial stability is crucial alongside addressing price risks, given the continuous increase in the country’s high household debts. The bank emphasizes the need to prevent excessive borrowing or risky investments, especially during loose monetary policy. To achieve this, the bank suggests that monetary policy should prioritize financial stability.In addition to this, the central bank proposes the implementation of a “prudential monetary policy” that places significant emphasis on both financial stability and price stability. By adopting such a policy, the bank aims to strike a balance between maintaining stable prices and ensuring the overall stability of the financial system.
In June, South Korea’s household debt reached a record high, primarily driven by rising demand for mortgage loans. While the central bank recognizes limited financial stability risks from household debt due to low loan-to-value ratios and a high percentage of high-income earners, it expresses concerns about the potential negative long-term effects on growth and inequality.
To mitigate these risks, the central bank urges policymakers to communicate cautiously, ensuring that households fully comprehend the risks associated with potential interest rate changes. By providing clear and transparent information, the bank hopes to encourage responsible borrowing and discourage excessive debt accumulation.
Despite maintaining a stable monetary policy since the last interest rate hike in January, the central bank has not dismissed the possibility of further rate hikes, as stated by its governor in a recent statement. This suggests that the bank remains vigilant and ready to take necessary measures to address any emerging risks to financial stability.
Overall, the central bank of South Korea highlights the importance of actively managing financial stability in the face of increasing household debts. By prioritizing financial stability in monetary policy decisions and implementing prudential measures, the bank aims to safeguard the overall health of the financial system and promote sustainable economic growth.
