Bank of Korea Governor Rhee Chang-yong said on Monday recent market concerns over a financially troubled builder are a "warning sign" over the financial risks of prolonged monetary tightening.
While managing inflation remains the top priority, it is important to find the right policy mix as South Korea approaches the end of its long fight to bring consumer prices under control, Rhee said in a New Year message.
He cited doubts about the integrity of commercial real estate loans in major countries and a mid-sized local developer that was forced to restructure its heavy debt load as some of the warning signs for the economy.
"There is a need to be thoroughly prepared for the possibility of financial instability that can arise as tightened policy continues," he said.
"We need to pay particular attention to make sure credit risks do not grow around what is a weak link in our economy."
Rhee met with Finance Minister Choi Sang-mok and financial regulators on Friday and pledged to provide liquidity support after an announcement by Taeyoung Engineering & Construction (009410.KS) to restructure its debt caused market jitters.
The country's 16th largest builder has 4.58 trillion won ($3.6 billion) of debt, including project financing loans.
The central bank's inflation target of 2% remains valid although external and domestic factors require more fine tuning to determine the optimal interest rate path and how much longer to maintain tightened monetary policy, Rhee said.
South Korea's annual consumer inflation eased for a second month in December to 3.2%, supporting the BOK's view on the inflation path, which is that price pressure will ease gradually to its target level of 2% towards the end of 2024.
President Yoon Suk Yeol said on Monday that pressure on prices is expected to ease further in 2024 and the government will take measures to ensure the financially more vulnerable, including small business owners, see the benefits of a pull back in inflation.
