BOK chief apologizes over ETF risks, leaves door open to further rate hikes

Bank of Korea (BOK) Gov. Shin Hyun-song apologized on Monday for failing to adequately warn investors about the risks of single-stock leveraged exchange-traded funds (ETF) during their introduction.

“I failed to adequately warn investors about the risks, and I apologize to the public,” Shin said in response to a question from Democratic Party (DP) Rep. Jung Sung-ho during a parliamentary audit by the National Assembly's Finance, Economy, Planning and Budget Committee at BOK headquarters in Jung District, central Seoul.

The government introduced single-stock leveraged ETFs in May to curb investment outflows to similar overseas funds, but later reversed course as trading overheated. Regulators suspended new listings on July 16 pending tighter investor protections and raised the minimum deposit requirement for individual investors from 10 million won ($7,500) to 30 million won on July 31. Trading has since collapsed. 

Shin acknowledged that he had failed to fully grasp the volatility in the domestic stock and memory chip markets in late May. 

Shin also conceded that the BOK's June Financial Stability Report had been “inappropriate” in projecting that the introduction of the ETFs would help prevent domestic investment funds from flowing overseas while attracting more foreign capital into the Korean market.

On monetary policy, Shin said the BOK's decision to raise its benchmark interest rate in August ahead of the U.S. Federal Reserve had bought the central bank time.

He explained that acting early had imposed a lower economic cost than raising rates belatedly in response to market pressure.

Shin projected that inflation would remain above the BOK's 2 percent target for a considerable period due to accumulated cost pressures and rising demand, and left the door open to further interest rate hikes.

“Pre-emptively controlling core inflation is crucial to achieving our inflation target going forward,” Shin emphasized.

He said the timing and pace of any additional rate hikes would be determined based on a comprehensive assessment of inflation, economic conditions and financial stability.

Shin also raised concerns about financial imbalances stemming from rising home prices in the greater Seoul area and growing household debt.

Asked about housing loans provided to BOK employees that fall outside debt service ratio regulations, Shin said the central bank would assess borrowers' repayment burdens and review whether changes to the lending system were necessary.

The BOK governor also projected optimistically about the semiconductor boom, saying, “The market expects the semiconductor boom to continue through next year and the year after.”

BY KO SEUNG-PYO [[email protected]]