Seoul: South Korea's central bank has opted to keep its benchmark interest rate unchanged, marking the second consecutive time it has made such a decision in response to ongoing financial stability concerns, particularly those related to rising housing prices and household debt.
According to Yonhap News Agency, the Bank of Korea's (BOK) Monetary Policy Board maintained its key rate at 2.5 percent at its recent meeting in Seoul. This decision, which was largely anticipated, follows a similar rate freeze in July. The BOK has taken a cautious approach, balancing the need to support economic growth with the imperative to safeguard financial stability, amid uncertainties stemming from the aggressive tariff policy of the United States.
In a statement, the BOK acknowledged the uncertainties surrounding the economic growth outlook but noted modest improvements driven by domestic demand. It emphasized the need for vigilant monitoring of housing price movements in Seoul and household debt levels. Consequently, the Board deemed it prudent to keep the base rate steady while assessing domestic and external conditions.
The BOK has revised its economic growth forecast for the nation, attributing this to the impact of government economic stimulus measures. The growth outlook was adjusted upwards by 0.1 percentage point to 0.9 percent for this year. Governor Rhee Chang-yong revealed that five out of six board members supported the rate freeze and voiced the possibility of future rate reductions within the next three months.
Despite the central bank's monetary easing cycle, which commenced in October and included a cumulative 100 basis point rate cut, the property market remains volatile. Apartment prices in parts of Seoul continue to rise, albeit with slower growth rates in recent weeks. Data from the Korea Real Estate Board showed a 0.14 percent rise in apartment prices in early October, slowing to a 0.09 percent increase by the third week.
To combat soaring housing prices, the government imposed a 600 million-won cap on mortgage loans for properties in the capital region and suspended home-backed loans for multi-homeowners. Additional regulations on household debt have been in effect since July, resulting in a slower growth rate of household loans extended by major banks in July.
Rhee emphasized that interest rates alone cannot control housing prices, highlighting the need to prevent excessive liquidity supply that could fuel expectations of further price increases. He noted that real estate prices significantly impact overall inflation, given that over half of South Korea's population resides in the Seoul metropolitan area. The government is anticipated to announce further real estate measures, with the BOK coordinating its policies accordingly.
The decision to maintain rates also considered the widening interest rate gap with the U.S., which stands at a record high of 2 percentage points since May. This gap poses risks of a weakening Korean won and potential capital outflows. Signs of recovery in private consumption, supported by a supplementary budget and a tariff deal with the U.S., also influenced the BOK's decision.
Governor Rhee commented on the recent South Korea-U.S. summit, expressing optimism about the positive outcomes and indicating that there was no need for significant revisions to the BOK's economic outlook. The central bank has maintained its growth forecast for next year at 1.6 percent, and it is expected to continue its current monetary easing cycle through the first half of the following year.