The Bank of Korea's Monetary Policy Committee has frozen the base rate at 2.50% per annum, halting the rate reduction that resumed in May. This decision is analyzed to have been made in light of the recent sharp rise in housing prices, particularly in the metropolitan area, and the steep increase in household loans. It appears that the upcoming regular meeting of the U.S. Federal Open Market Committee (FOMC) at the end of this month was also taken into consideration.
The Bank of Korea's Monetary Policy Committee (hereinafter referred to as the MPC) has frozen the base rate at 2.50% during the regular meeting held on the 10th. The Bank of Korea had raised the base rate from 0.5% to 3.5% from August 2021 until January 2023, maintaining the rate for 1 year and 7 months. After lowering the rate consecutively in October and November last year, it had alternated its choices between freezing (January, April) and lowering (February, May) the rate.
The MPC, in its monetary policy direction resolution, stated, "The rise in housing prices in the metropolitan area and the significant increase in household debt have expanded greatly, and given the need to also consider the impact of the recently strengthened household debt measures, it is deemed appropriate to maintain the current base rate level," and explained, "The MPC will continue to monitor growth while ensuring that the inflation rate stabilizes at target levels in the medium term, while also paying attention to financial stability in managing monetary policy."
Ahead of the MPC meeting, the majority of the market projected a freeze on the base rate. According to a survey of 100 individuals engaged in bond holding and management conducted by the Korea Financial Investment Association from the 27th of last month to the 2nd of this month, 93% of respondents anticipated a rate freeze. This represents an increase of 62 percentage points from the previous survey in May.
In the market, the main rationale for the freeze is the potential overheating of the Seoul real estate market and the sharp increase in household loans. According to the financial sector, as of the end of last month, the household loan balance at the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) was 754.83 trillion won, an increase of 6.75 trillion won from the end of May (748.81 trillion won). This marks the highest increase since last August, which recorded a rise of 9.63 trillion won, 10 months ago.
The government has strengthened regulations, including lowering the housing mortgage loan limit to 600 million won since the 28th of last month, but it is expected that the increase in household loans will continue for the time being. This is because the land transaction permission system applied in the three districts of Gangnam (Seocho, Gangnam, and Songpa) was lifted and then reassigned just a month later, which led to an increase in housing transactions. Typically, there is a time lag of 1 to 3 months from housing transactions to the execution of loans.
There are also opinions suggesting that the effects of the second supplementary budget (extra budget) passed by the National Assembly on the 4th should be monitored. The government submitted a supplementary budget plan worth 30.5 trillion won to the National Assembly last month to stimulate domestic demand, which was confirmed on the 4th at 31.8 trillion won after undergoing preliminary review by various standing committees. As the government takes steps to stimulate the economy through fiscal policy, the Bank of Korea will also be able to decide on the timing of rate cuts with more leeway.
The U.S. Federal Reserve (Fed) has also adjusted the pace of rate cuts, adding weight to cautious views. Jerome Powell, the chair of the Fed, stated in written testimony submitted ahead of a meeting with the U.S. House Financial Services Committee on the 24th of last month (local time), "We are in a good position to wait and see how the economy moves for the time being," reiterating the existing 'wait-and-see' stance. Despite pressure for rate cuts from U.S. President Donald Trump, he indicated that he would carefully monitor the potential impacts of tariff policies.
However, there is also the possibility that rate cuts may resume in the future. This is due to expectations that global trade will contract because of U.S. tariff policies. In particular, there is a high possibility that exports, which support Korea's economy, will be adversely affected. According to a recent report published by the Korea International Trade Association, the overall U.S. imports for January to April of this year totaled $1.2242 trillion, a 19.2% increase compared to the same period last year, while imports from Korea decreased by 5.0% to $41.7 billion. Korea's market share in the U.S. import market has dropped from 4.0% last year to 3.4% this year, falling from 7th to 10th place.
The increasing downward pressure on the economy due to the U.S. reciprocal tariff policy is also raising the necessity for rate cuts. On the 8th, the U.S. sent a letter stating that "a reciprocal tariff of 25% will take effect on August 1" to Korea and Japan. Global investment bank Wells Fargo analyzed that "the high tariffs imposed by the U.S. will act as a burden on the economic activities of both Korea and Japan, keeping the growth rates of both countries at around 0.5% to 1% this year," and that the countries will also be influenced by second-order effects such as reduced global trade and deteriorating investment sentiment.
The International Financial Center reported on the 4th that the average growth rate forecast for Korea's economy by eight IBs this year is about 0.9% as of the end of June. Considering the economic stimulus effects from supplementary budget spending, this has increased by 0.1 percentage point compared to the previous month but still has not reached the 1% level.
Jo Yong-gu, a researcher at Shinyoung Securities, noted, "As the economic outlook improves and based on the government's expansionary fiscal policy, monetary policy will cooperate in responding to the economy while also considering financial stability aspects like household debt, creating a structure that remains vigilant against excessive easing."