Seoul: South Korea's central bank maintained its benchmark interest rate at 2.5 percent on Thursday, aiming to stabilize financial conditions amidst a booming housing market and a depreciating national currency.
According to Yonhap News Agency, the Bank of Korea (BOK) decided to keep the rate unchanged for the third consecutive time. The central bank emphasized the need to monitor the financial stability conditions, particularly focusing on the impact of real estate stabilization measures on housing markets in Seoul and surrounding regions, as well as the ongoing volatility in exchange rates.
Out of the six members on the Monetary Policy Board, five supported the decision to hold the rate steady, with four advocating for the possibility of further rate cuts within the next three months, as stated by BOK Governor Rhee Chang-yong during a press briefing. Since beginning its monetary easing cycle last October, the central bank has reduced the key interest rate by a total of 100 basis points, with the latest reduction occurring in May.
Despite these efforts, surging home prices in Seoul and adjacent areas have increased household indebtedness, limiting the central bank's policy options. "Real estate prices in Seoul and the greater Seoul area are too high, considering income levels and the need to maintain social stability," Rhee remarked, noting that current property values are hindering economic growth.
The government has implemented a series of measures to cool the real estate market, including designating 21 additional districts in Seoul as speculative zones, thus subjecting all 25 districts in the capital to stricter regulations. Lending rules have also been tightened, with the mortgage loan cap lowered to as little as 200 million won from the previous 600 million won.
Household loans extended by South Korean banks reached a record 1,170.2 trillion won at the end of last month, although their growth has decelerated due to these regulations. The household debt-to-GDP ratio rose to 89.7 percent at the end of June, marking its first quarterly increase in 15 quarters.
The depreciation of the won has become another major concern for policymakers, with the local currency falling below 1,420 per dollar due to the strong U.S. dollar and uncertainties in tariff negotiations with the United States. A rate cut could potentially weaken the won further, leading to capital outflows. The currency opened at 1,431.8 per dollar on Thursday, a decrease of 2 won from the previous session.
Governor Rhee expressed expectations for the currency to stabilize following the conclusion of tariff talks and the reduction of uncertainty. A framework deal between Seoul and Washington, involving a 15 percent tariff on South Korean goods and a $350 billion fund for U.S. investments, remains under negotiation.
Economic indicators supporting the BOK's decision include strong exports and recovering domestic consumption, alongside stable inflation. However, the central bank remains cautious about variables affecting its November rate-setting meeting, particularly in light of global trade dynamics and the performance of the semiconductor industry.
The BOK previously forecasted a 0.9 percent economic growth for South Korea this year, with a revised outlook due in November. For 2026, the projected growth stands at 1.6 percent. The rate decision on Thursday leaves a gap of up to 1.75 percentage points between South Korea's and the U.S.' key interest rates, following the Federal Reserve's rate cut in September.