The Monetary Policy Committee of the Bank of Korea has halted interest rate cuts and is taking a breather. Although the risk of economic slowdown remains high due to uncertainties stemming from the U.S., the committee has decided that resolving the "overheating issue of the housing market" manifested by soaring home prices and rising household debt takes priority. Expectations that the 31.8 trillion won supplementary budget would offset some of the downward pressure on the economy also played a role.
The market anticipates that the Bank of Korea will resume rate cuts within the year. However, opinions are divided on the timing of any additional cuts. Generally, there is a consensus that the likelihood of a cut in August is high, but there is also a perspective that it could be pushed back to October depending on the results of tariff negotiations and the rising home prices.
◇ The key interest rate holds at 2.50%... “The increase in household debt is likely to continue for the time being”
The Monetary Policy Committee of the Bank of Korea unanimously decided at its regular meeting on the 10th to keep the key interest rate at 2.50% per annum. The Bank lowered rates by 0.25 percentage points in October and November of last year, and since this year has alternated between holding rates steady (January, April) and lowering them (February, May).
This decision was significantly influenced by the overheating of the housing market and the increase in household loans. According to the Korea Real Estate Board, the sales price of apartments in Seoul rose by 0.43% in the fourth week of June (as of the 23rd) compared to the previous week, marking the largest increase in 6 years and 9 months since the second week of September 2018 (0.45%).
The household loans propelling housing demand have also surged rapidly. In June, household loans in the banking sector increased by 6.2 trillion won compared to the previous month, reaching a total of 1,161.5 trillion won. This is the largest increase since August of last year (9.2 trillion won), and it has shown an increasing trend for five consecutive months since February this year.
The government has implemented stringent regulations, such as lowering the limit for mortgage loans to 600 million won since the 28th of last month; however, it is anticipated that the increase in household debt will continue for the time being. This is because the land transaction permission system, which was applied in the Gangnam area (Seocho, Gangnam, and Songpa districts) in February, was re-designated after being lifted just a month prior, resulting in an increase in housing transactions. Typically, there is a 1-3 month lag from housing transactions to loan execution.
Lee Chang-yong, the governor of the Bank of Korea, said at a press conference immediately following the Monetary Policy Committee meeting, "It seems that the increase in household debt will continue for another month or two as the transaction volume has gone up recently," adding, "In this decision, it was judged necessary to calm the overheating psychology in the housing market and to examine the effectiveness of measures related to household debt."
Although the downward risks to the economy from U.S. tariff policies remain, it was also noted that growth paths could shift based on the effects of the supplementary budget and the outcomes of tariff negotiations with the U.S. The governor stated, "Both upward risks associated with the supplementary budget and downward risks stemming from U.S. tariff policy exist in relation to growth," adding, "Particularly, after monitoring the developments in the tariff negotiations until the end of July, I believe there is room for a response." He also projected that the supplementary budget could raise Korea's economic growth rate by 0.1 percentage points.
However, the Monetary Policy Committee members left the possibility of future cuts open. Of the six committee members present at the meeting, four agreed that the key interest rate should be considered for lowering below 2.50% within three months. The governor noted, "Four members left room for further cuts while emphasizing the need to observe the effects of lending policies," and added, "The other two felt more time was needed to gain confidence regarding financial stability, and noted that the gap in interest rates with the U.S. exceeding 2 percentage points should be closely monitored."
◇ Experts say an August cut seems likely, but it could be delayed to October
The market atmosphere seems to predict this interest rate hold. According to a survey conducted by the Korea Financial Investment Association from the 27th of last month to the 2nd of this month, 93% of 100 respondents working in bond holding and management expected an interest rate hold. A recent survey conducted by ChosunBiz found that all 11 macroeconomic and bond experts from domestic securities firms predicted a hold.
However, opinions were divided on the timing of additional rate cuts. While the likelihood of an August cut was generally seen as high, there were also considerable views suggesting it could be postponed to October depending on the rise in house prices in the metropolitan area and the outcomes of reciprocal tariff negotiations with the U.S.
Those advocating for an August cut emphasized the downward risks to the economy. Kang Seung-won, a bond strategy team leader at NH Investment & Securities, stated, "The governor has made it clear that while real estate is important, the downward risks to the economy are also pivotal indicators for interest rate decisions," adding, "If the effects of government policies such as strengthening household debt management become visible, the Bank of Korea might change its stance towards lowering interest rates."
On the other hand, those suggesting the likelihood of an October cut noted Governor Lee Chang-yong's mention of housing prices. Jo Yong-gu, a researcher at Shinyoung Securities, remarked, "Until now, the governor had expressed that household debt was a problem rather than prices, but this time he mentioned housing prices directly," adding, "It seems that he judged the overheating in the Seoul area to be quite serious, making it urgent to calm the market sentiment." Jo also assessed, "While maintaining the possibility of an August cut, he leaves room for delaying it to October."
Lee Jeong-hoon, a researcher at Eugene Securities, also evaluated, "I think the possibility of an August cut is high, but it cannot be ruled out that it could be postponed to October." He remarked on the recent Monetary Policy Committee meeting, "Overall, it seems that there has been considerable concern over financial stability," stating, "There has been a consistent stance that the Bank of Korea should not hastily lower rates to stimulate housing prices, and it seems that vigilance on that front has heightened recently."
There were also assessments that the Monetary Policy Committee has kept all options open due to uncertainties surrounding U.S. tariff negotiations. Woo Hye-young, a researcher at LS Securities, noted, "If the Bank of Korea had raised its economic outlook or placed emphasis on financial stability, the timeline for a cut could have been pushed to October, but neither condition was satisfied during this Monetary Policy Committee meeting," adding, "It appears that signals were given that a cut could happen or not depending on the results of the August tariff negotiations."
Market reactions were also mixed. The yield on government bonds fell in anticipation of an interest rate cut. In the Seoul bond market, the yield on three-year government bonds recorded 2.433%, down 4.5 basis points (1 basis point = 0.01 percentage points) from the previous trading day. The yields on five-year and ten-year bonds also closed lower at 2.592% and 2.814%, down 4.4 basis points and 4.0 basis points, respectively. Conversely, the won showed strength, with the closing price of the won-dollar exchange rate (as of 3:30 p.m.) trading down 5.0 won at 1,370.0 won.