Seoul: South Korea's central bank maintained its benchmark interest rate at 2.5 percent for the second time in a row, aiming to ensure financial stability amidst ongoing concerns over rising housing prices and household debt.
According to Yonhap News Agency, the Monetary Policy Board of the Bank of Korea (BOK) decided to keep the key rate unchanged during its rate-setting meeting in Seoul. This decision marks the second consecutive hold, as the BOK emphasizes the necessity of supporting economic growth.
The BOK released a statement noting that although there is significant uncertainty surrounding the economic growth outlook, there has been modest improvement driven by domestic demand. However, the movements in housing prices in Seoul and its surrounding areas, along with household debt, require continued monitoring. The Board judged it appropriate to maintain the current base rate while assessing changes in domestic and external conditions.
The central bank also highlighted that it would maintain a rate cut stance to mitigate downside risks to economic growth and adjust the timing and pace of any further rate cuts. The BOK initiated its monetary easing cycle in October, cutting the key interest rate by a total of 100 basis points, with the latest reduction occurring in May.
Thursday's decision underscores the BOK's focus on maintaining financial stability as the property market remains unsettled. Despite tighter lending regulations, apartment prices in parts of Seoul continue to grow. Data from the Korea Real Estate Board indicates that apartment prices in Seoul increased by 0.14 percent in the first week of this month, which is an acceleration from the previous week's 0.12 percent gain, although the increase slowed to 0.09 percent in the third week.
In response to soaring housing prices, authorities in late June imposed a 600 million-won (US$431,769) cap on mortgage loans for property purchases in the capital region and suspended home-backed loans for multi-homeowners. Tighter debt-service-ratio (DSR) regulations have also been applied to nearly all types of household debt since July. Despite these measures, concerns remain that household loans extended by major South Korean banks could increase again amid rising home transactions.
Another factor in the BOK's decision is the widening interest rate gap with the United States. This gap has reached a record high of 2 percentage points since the BOK's latest rate reduction in May, raising the risk of a weakening Korean won and potential capital outflows by foreign investors.
The BOK's decision to freeze rates is further supported by signs of recovery in private consumption, partly due to the government's supplementary budget and the conclusion of a tariff deal with the U.S., which has eased some uncertainties. The BOK raised its economic growth outlook for South Korea this year by 0.1 percentage point to 0.9 percent, citing the effects of the government's economic stimulus measures.