Seoul: South Korea's central bank kept its benchmark interest rate unchanged Thursday, taking a cautious approach amid concerns about rapidly rising housing prices, growing household debt, and uncertainties stemming from the United States' tariff policy. In a widely expected decision, the Monetary Policy Board of the Bank of Korea (BOK) held its key rate steady at 2.5 percent during a rate-setting meeting in Seoul.
According to Yonhap News Agency, the move followed a rate cut in May, when the BOK lowered the policy rate by 25 basis points to support economic growth amid sluggish domestic demand and uncertainty stemming from the United States' sweeping tariff measures. "Economic growth is forecast to remain low for some time, and there is high uncertainty related to trade negotiations, while the inflation rate remains broadly stable," the BOK said in a released statement.
"But it is necessary to assess the impact of the recently strengthened measures for household debt management, and given the significant acceleration in housing prices in Seoul and its surrounding areas, and household debt, the Board judged that it is appropriate to maintain the current level of the base rate." Thursday's decision underscores the BOK's focus on maintaining financial stability, despite ongoing pressure to support economic growth.
Housing prices in Seoul and parts of the greater capital area have surged, fueled by easing financial conditions and expectations of further price increases under the new liberal government. Household loans extended by South Korean banks rose by 6.2 trillion won (US$4.51 billion) in June from the previous month, marking the largest monthly gain since August 2024. The BOK expects the upward trend to continue in the coming months.
In response, the government implemented stricter mortgage regulations late last month, capping mortgage loans for home purchases in the capital region at 600 million won and suspending home-backed loans for multi-homeowners. President Lee Jae Myung has signaled the possibility of additional measures, including plans to boost housing supply and further regulate the market to curb speculation.
BOK Gov. Rhee Chang-yong earlier signaled that the pace of rate cuts would be adjusted based on housing market conditions. Following the rate cut announcement in May, he warned, "Lowering the base rate too quickly could fuel asset prices, such as real estate. We must not repeat the mistakes made during the COVID-19 period."
BOK board members also weighed risks arising from the unpredictable U.S. tariff policy. U.S. President Donald Trump pledged to impose 25 percent reciprocal tariffs on South Korea starting Aug. 1, emphasizing that no further deadline extensions will be granted. The Seoul government has gone all out in negotiations with the U.S. to avert the tariffs.
The on-hold decision will give the central bank time to assess the impact of the government's supplementary budget, according to analysts. Last week, the National Assembly passed an extra budget of 31.8 trillion won aimed at stimulating the economy and supporting the people's livelihoods. The latest package follows a 13.8 trillion-won stimulus approved in May.
Also under consideration in the rate freeze decision was the interest rate gap between South Korea and the U.S., which currently stands at up to 2 percentage points. A further widening of the gap could increase volatility in the foreign exchange market. Federal Reserve Chair Jerome Powell has taken a cautious stance on adjusting interest rates, citing the resilience of the U.S. economy and various uncertainties.