The Bank of Korea (BOK) said in its biannual monetary policy report that the country's household debt, unlike major economies, continued to increase without deleveraging and reached a level hampering the macroeconomic and financial stability.
If the ratio of household debt to gross domestic product (GDP) tops a range of 80-100 percent, the higher burden of repaying excessive debt can reduce the real disposable income of households, dampening private consumption and hindering economic growth, the BOK said.
South Korea's household debt to nominal GDP ratio stood at 105 percent at the end of 2022.
The BOK warned that excessive household debt can raise the possibility of financial crisis by increasing vulnerability to internal and external shocks, especially in the case of excessive debt linked to asset price bubbles.
Since the BOK began to lift policy rates in August 2021, South Korea's ratio of household debt to nominal GDP has gradually fallen, but risks of financial instability grew recently amid the rebound in housing prices and the expanded household loan from banks, the central bank noted.
The BOK had left its policy rate unchanged at 3.50 percent since January, after raising it by 3.0 percentage points for the past one and a half years.
Mortgage loans, extended by banks to households, jumped 7 trillion won (5.3 billion U.S. dollars) in August, marking the fastest growth in three and a half years since February 2020.
The BOK said it will determine the need for further key rate hikes while maintaining the tightening monetary policy stance for a considerable time with a focus on price stability, expecting the headline inflation to top the BOK's midterm inflation target of 2 percent for a considerable time.
South Korea's consumer prices gained 3.4 percent in August from a year earlier, surpassing the inflation target level for the 29th consecutive month.
The central bank noted that inflation expectations still exceeded the target level of 2 percent as it tended to take a considerable time for the inflation expectations to slow down, saying the inflationary pressure could rise further on the recently increased volatility in raw materials prices and the won/dollar exchange rate.
Inflation expectations, which measure the outlook among consumers over headline inflation for the next 12 months, stood at 3.3 percent in August, unchanged from the previous month.
Dubai crude, South Korea's benchmark, averaged 86.46 U.S. dollars per barrel in August, up 7.5 percent from 80.45 dollars a month earlier.
The average won/dollar exchange rate climbed to 1,318.47 won per dollar in August from 1,286.30 won in the prior month.
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