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Stock correction warning

BOK governor warns of abrupt stock market correction; holds rate steady

By Jan 15, 2021 (Gmt+09:00)

2 Min read

BOK governor warns of abrupt stock market correction; holds rate steady

South Korea’s central bank governor has warned of an abrupt stock market correction, asking investors to refrain from excessive borrowing amid a fragile economic recovery.

Speaking at a media briefing on Jan. 15 after the Bank of Korea board unanimously agreed to keep its policy rate steady at a record low of 0.5%, Lee Ju-yeol said the speed of the stock market rally is “too fast.”

“It is hard to judge the Kospi’s recent surge as a bubble, but given the latest economic indicators, the stock market’s gains are too fast,” Lee said following the BOK’s first rate review of the year.

The benchmark Kospi index finished down 2% at 3,085.9 on Friday, marking its first decline in three days.

Driven by ample liquidity and cheap bank loans to fight the COVID-19 pandemic, the local equities market has rallied, rising above 3,000 points for the first time ever earlier this year. The Kospi jumped about 30% in 2020.

At Friday’s media briefing, Gov. Lee mentioned “asset price (stock price) correction” six times to warn against aggressive buying in the stock market.

“Increasing investment based on excessive leverage can cause unbearable losses for investors when there’s a price correction due to an unexpected shock,” Lee said.

Among risks that could rattle the financial markets, the governor listed a potential change in other central banks’ monetary policies; geopolitical tensions; a delay in vaccine deployment; and a worsening of the global pandemic.

Latest data showed Korean households and companies have taken out fresh loans worth 208 trillion won ($189 billion) from banks last year, pushing the outstanding debt balance and the annual debt-increase rate to record highs.

Banks’ outstanding balance of household and company loans stood at 1,965.2 trillion won ($1.8 trillion) at the end of 2020.

BOK governor warns of abrupt stock market correction; holds rate steady
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The BOK governor, however, played down the possibility of any hawkish action in the near future, citing the need to safeguard the recovery in the local economy. The country’s low inflation and rising property prices will also prompt the central bank to keep its base rate unchanged for quite a while.

“It is too early to think about an exit plan, considering the current status of the real economy. A change in our monetary stance is not an option,” he said.

Analysts expect the central bank to maintain its accommodative stance throughout the year.

“We continue to expect that the BOK will stand pat through 2022 as a baseline case, yet with an increasing risk of initiating a rate hike next year,” said JPMorgan’s Park Seok-Gil.

He added that while the bank has not delivered a hint of policy stance change yet, financial stability concerns and GDP growth environment may ultimately nudge the BOK towards policy normalization as a baby step.

Write to Ik-Hwan Kim at lovepen@hankyung.com
In-Soo Nam edited this article.
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