Introduction to the Bank of Korea’s Decision
The Bank of Korea (BOK) has decided to pause its rate-cutting cycle due to concerns over soaring home prices in Seoul. This decision was made at the BOK’s monetary policy meeting, where the board unanimously voted to keep the base interest rate steady at 2.5 percent.
The Reason Behind the Pause
The main reason for this pause is the unrelenting rise in Seoul’s housing prices. According to BOK Gov. Rhee Chang-yong, the pace of price increases in the capital area is faster than in August last year, and the level of concern is now even higher. The central bank refrained from a rate cut in August last year, citing housing market overheating risks despite expectations of policy easing.
Impact of Low Interest Rates
Low interest rates could further boost demand for housing, particularly among those willing to stretch their borrowing capacity to buy property. The BOK predicts that the increase in housing transactions before the June 27 measures will continue until August and September due to the increase in housing mortgage loans. In fact, apartment prices in Seoul rose by 0.43 percent in the fourth week of June, the biggest weekly jump since September 2018.
Concerns Over Household Debt
Excessive household debt is a drag on consumption and broader economic growth. In a highly real estate-dependent economy like Korea’s, a future drop in housing prices could deepen consumption slumps and lead to bad debts at banks. The government and BOK aim to reduce the household debt-to-GDP ratio, which currently stands at nearly 90 percent, to below 80 percent.
Global Economic Factors
The uncertainty regarding the timing of additional interest rate cuts in the U.S. is also a factor in the BOK’s decision. The market sees a high possibility that the U.S. Federal Reserve will freeze interest rates at the end of July and slow the pace of rate cuts in the future. If Korea lowers its interest rate first and the interest rate gap with the United States widens to more than 2 percentage points, export companies may face difficulties due to the depreciation of the won.
Economic Growth and Consumption
Rhee mentioned that private consumption is improving compared to the outlook in May, but construction investment has worsened. However, the additional 32 trillion won supplementary budget plan, including the people’s livelihood recovery consumption coupons, is expected to prevent a further slowdown in the growth rate. The BOK estimated that this year’s annual growth rate will rise by 0.1 percentage points from the 0.8 percent forecast presented in May due to this supplementary budget.
Conclusion
In conclusion, the Bank of Korea’s decision to pause its rate-cutting cycle is a cautious move to prevent further fueling of soaring home prices in Seoul. The BOK is weighing the trade-off between growth and financial stability, and the board may become more divided in its views if the conflict between these two goals intensifies. As the economy continues to grow, it is essential to monitor the housing market and household debt to ensure sustainable economic growth and financial stability.
