The Bank of Korea has kept the base interest rate steady at 3.50% per annum. This marks the 13th consecutive hold since February last year. Although the recent stabilization of inflation and continued sluggish domestic demand have increased the need for a rate cut, the rapid rise in housing prices centered in the Seoul metropolitan area has made it difficult to lower rates hastily. The market expects the Bank of Korea to cut the base rate in October.
On the same day, the Bank of Korea also released a revised economic outlook, lowering this year's economic growth forecast from 2.5% to 2.4%. The consumer price inflation forecast was also slightly reduced from 2.6% to 2.5%.
The Monetary Policy Committee (MPC) of the Bank of Korea announced on the 22nd at 9 a.m. at the Bank's headquarters in Jung-gu, Seoul, that it had kept the base interest rate at 3.50% per annum. Since raising the rate by 0.25 percentage points from 3.25% to 3.5% in January last year, the Bank has held the rate steady for 13 consecutive times, marking the longest hold period in history.
Inflation, the main reason for the previous holds, is generally showing signs of stabilization. The Consumer Price Index (CPI) inflation rate has remained in the 2% range for four consecutive months since April (2.9%), and the core inflation index has stayed in the low 2% range, indicating a stable trend. The expected inflation rate for the next year has also remained in the 2% range for two months. However, the possibility of inflation rising again cannot be ruled out due to geopolitical risks from the Middle East and poor crop yields caused by heatwaves.
Additionally, with the U.S. rate cut in September becoming almost certain and the dollar weakening, the won-dollar exchange rate recently hit a five-month low, showing signs of stabilization. This month, the won-dollar exchange rate dropped sharply by about 30 won, falling to the low 1300 won range.
However, the rise in housing prices centered in the Seoul metropolitan area is hindering a rate cut. According to the Korea Real Estate Board, the Seoul housing sales price index in July rose by 0.76% compared to the previous month, marking the largest increase since December 2019. Household debt is also rising sharply. According to the Bank of Korea, the outstanding balance of mortgage loans surged by 16 trillion won compared to the previous quarter at the end of Q2. Bank of Korea Governor Lee Chang-yong stated at the July MPC meeting, "The Bank should not implement policies that trigger housing price increases."
Due to prolonged high interest rates and continued sluggish domestic demand, the prevailing view is that the Bank of Korea will cut rates at the October MPC meeting. Professor Andonghyun of Seoul National University's Department of Economics said, "If rates are lowered, household debt will increase and housing prices will continue to rise," but added, "However, since private consumption is very weak and the livelihood economy is struggling, I expect a rate cut in October." Joo Won, head of economic research at Hyundai Research Institute, said, "Given the current economic situation, the possibility of Korea lowering its base rate before the U.S. is close to zero," adding, "If the U.S. cuts rates in September, Korea will likely cut rates in October or November."
On the same day, the Bank of Korea released a revised economic outlook, lowering this year's economic growth forecast from 2.5% to 2.4%. This is because exports, led by semiconductors, are performing well, but domestic demand remains sluggish.
The consumer price inflation forecast was also lowered from 2.6% to 2.5%. This reflects expectations that inflation will generally slow down as prices show a downward stabilization trend recently.
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