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South Korea growth not linked to rate rise: central bank head

Seoul: South Korea’s economy is likely to be growing at its full potential by late next year but this will not necessarily lead to an interest rate rise, its central bank chief said in comments published Sunday.

Bank of Korea (BOK) governor Kim Choong-soo also dismissed fears the country’s massive household debt burden would spark a financial crisis similar to the 2008 US meltdown over soured subprime mortgages.

“Given that the economy continues growing as anticipated, it is likely to reach its full potential growth rate late next year,” Yonhap news agency quoted Kim as saying on Friday in embargoed comments.

This rate – estimated at around four percent – is the pace which could be achieved without adding to inflationary pressure.

“You may think, therefore, the benchmark interest rate will likely be raised sometime in the second half of next year [to curb inflationary pressure]”, Kim said.

“But you don’t need to link to a raise in the rate.”

The central bank on Thursday kept its benchmark interest rate unchanged at 2.5 percent for the sixth straight month as the economy shows a moderate recovery and inflation remains under control.

The central bank last month maintained its July forecast for 2013 growth of 2.8 percent, but cut its 2014 outlook to 3.8 percent from 4.0 percent previously.

It cited slow global growth and persistent downside risks.

Inflation eased to a 14-year low of 0.7 percent last month, giving the central bank more time to hold off on adjusting rates.

But household debts, which stood at 980 trillion won (Dh3.4 trillion) at the end of June, are seen by many economists as a growing threat to the economy.

The debts are likely to surpass 100 trillion mark by the end of this year, amounting to some 80 percent of the country’s gross domestic product.

Kim, however, played down the risk. “I don’t think household debts will spark any financial crisis,” he said.

He noted most of the debts are owed by people with financial assets, who could pay them off if necessary.