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. 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.
According to Yonhap News Agency, this marked the third consecutive on-hold decision, though the BOK has emphasized the need to support economic recovery through monetary easing. 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, the central bank's policy options have been constrained as surging home prices in Seoul and nearby areas have increased household debt, and further cuts in borrowing costs could potentially overheat the housing market. In response, the government has introduced a series of measures to cool the real estate market, including the designation of 21 additional districts in Seoul as speculative zones, thereby placing all 25 districts in the capital under stricter regulations.
Additionally, lending rules have been tightened, lowering the mortgage loan cap to as little as 200 million won (US$139,600) from 600 million won set in June. Despite these regulatory measures, 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.
The depreciation of the won has also been a significant concern for policymakers. The local currency has dropped to well below 1,420 per dollar, reaching its lowest level in months. The continued strength of the U.S. dollar, along with uncertainties surrounding tariff negotiations with the United States, adds to the complexity. A rate cut could exacerbate the won's decline and potentially trigger capital outflows.
On Thursday, the local currency opened at 1,431.8 per dollar, down 2 won from the previous session. The decision to maintain the rate has left the gap between South Korea's and the U.S.' key interest rates at up to 1.75 percentage points. During its September meeting, the Federal Reserve cut its benchmark rate by a quarter percentage point to a range of 4-4.25 percent and indicated two more cuts this year.