The Bank of Korea’s decision last week to freeze its benchmark interest rate at a record low of 1.5 percent for five consecutive months has been seen by many economists here as signaling a possible turnaround from its policy tuned to help boost the growth momentum of the country’s economy. Since August 2014, the central bank has cut the rate on four occasions by a total of 1 percentage point.

After the latest rate-freeze decision was announced Thursday, a BOK official said it was clear that its next step would not be in the direction of a rate cut, though it might not move toward an early increase.

The central bank has suggested that a further rate cut will be of no meaningful help in reinvigorating the economy and hamper the work to restructure marginal companies saddled with heavy debts.

What has also made BOK officials cautious about lowering rates additionally is mounting household debt, which many analysts regard as posing the greatest potential threat to the Korean economy.

Figures released by the central bank a day before the announcement of the rate freeze showed that outstanding household loans extended by local lenders amounted to 624.8 trillion won ($539.3 billion) at the end of October, up 9 trillion won from the previous month. The on-month gain was the largest-ever in data going back to January 2008, surpassing the previous record of an 8.5 trillion won tallied in April.

Separate data from the BOK put the total debt owed by households in the country at 1,130.4 trillion won in February, compared with 963.1 trillion won two years earlier.

Analysts note that households are piling up debts while their disposable incomes have barely increased. According to figures from Statistics Korea, the average monthly disposable income earned by households stood at 3.48 million won in the second quarter, up 3.1 percent from a year earlier. The increase was more than offset by rising rent and education costs.

“Pushing to boost consumer spending without a rise in disposable income will only deepen the household debt problem,” said Jang Bo-hyeong, a senior researcher at the Hana Institute of Finance.

Data from the BOK showed the ratio of household debt to disposable income in Korea reached 164 percent last year, far above the corresponding figures for other advanced economies, which mostly remained under 130 percent.

The immediate concern regarding the ballooning household debt is that it may result in dampening domestic demand, which has been playing a key role in boosting growth in recent months. Korea’s economy expanded 1.2 percent on-quarter in the July-September period, marking the first time in five quarters that its growth rate surpassed the 1 percent threshold. Consumer spending rose 1.1 percent from three months earlier in the third quarter, contributing to a rise in domestic demand, which more than offset a decline in exports to bolster growth.

If the household debt problem gets out of control, however, it will not only cause a sharp reduction in domestic consumption but also jolt the financial stability of the country.

The sharp increase in bank loans to households was attributed largely to a rise in mortgage loans, which amounted to 465.1 trillion won in October, up 7 trillion won from the previous month. With the local property market showing signs of passing its peak, concerns are mounting that households may be weighed down by heavier debt burden.

Economists worry that if the central bank finds it inevitable to increase rates in the aftermath of a possible U.S. rate hike in December, the household debt problem may go beyond proper management.

BOK Gov. Lee Ju-yeol said last week measures need to be worked out to manage household debt, which he said was not at a dangerous level at the moment.

But many economists note policymakers at the central bank and the government should make more active efforts to prevent the problem from spinning out of control.

In July, the government unveiled a set of measures to tighten requirements for bank loans to households only to see the debt amount increasing.

Experts raise the need for the specific monitoring and management of debt in accordance to different income levels. This approach will help contain possible fallouts from the mounting debt while avoiding excessively dampening domestic consumption, they say.

Jang, the researcher at the Hana institute, said more effective measures are needed to reduce housing costs as disposable income of households could hardly be expected to increase significantly in a short period of time.

By Kim Kyung-ho (khkim@heraldcorp.com)