Seoul: South Korea's central bank kept its benchmark interest rate unchanged Thursday to maintain financial stability amid a red-hot housing market and a weakening currency.
According to Yonhap News Agency, 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 its rate-setting meeting in Seoul. This marked the third consecutive on-hold decision, though the BOK has stressed the need to support the economic recovery through monetary easing.
"It is necessary to further monitor financial stability conditions, such as the effects of real estate market stabilization measures on housing markets in Seoul and its surrounding areas and on household debt, as well as exchange rate volatility," the BOK said in a released statement. The central bank began its monetary easing cycle in October last year, cutting the key interest rate by a total of 100 basis points since then, with the most recent reduction implemented in May.
However, its policy room has been limited as surging home prices in Seoul and nearby areas have fueled household debt, and further cuts in borrowing costs could overheat the housing market. The government has rolled out a series of measures to cool the real estate market. Most recently, the government designated 21 additional districts in Seoul as speculative zones, bringing all 25 districts in the capital under tougher regulations. It also tightened lending rules, lowering the mortgage loan cap to as little as 200 million won (US$139,600) from 600 million won set in June.
Outstanding household loans extended by South Korean banks have continued to rise, reaching a record high of 1,170.2 trillion won at the end of last month, though their growth has slowed due to stricter regulations. The country's household debt-to-GDP ratio stood at 89.7 percent as of end-June, up 0.3 percentage point from three months earlier, marking the first on-quarter increase in the ratio in 15 quarters.
The won's slide has also been a key concern for policymakers. The local currency has fallen well below 1,420 per dollar, its lowest level in months, amid the continued strength of the U.S. dollar and uncertainties surrounding tariff negotiations with the United States, and a rate cut could further weaken the won and trigger capital outflows. The local currency opened at 1,431.8 per dollar Thursday, down 2 won from the previous session.
Also supporting the BOK's rate freeze decision were signs of economic improvement, underpinned by strong exports and recovering consumption, while inflation remained stable. Thursday's decision left the gap between South Korea's and the U.S.' key interest rates at up to 1.75 percentage points. At its September meeting, the Federal Reserve cut its benchmark rate by a quarter percentage point to a range of 4-4.25 percent and signaled two more cuts this year.
"The Board will maintain its rate cut stance to mitigate downside risks to economic growth and adjust the timing and pace of any further base rate cuts, while closely monitoring changes in domestic and external policy conditions and examining the resulting impact on inflation and financial stability," the statement read.