Bank of Korea Monetary Policy Committee Concerned About Soaring House Prices: "Interest Rate Cuts Likely Only After Household Debt Is Controlled"

Bank of Korea Releases Minutes of August Monetary Policy Meeting

On the 22nd of last month, the Monetary Policy Committee was held at the Bank of Korea in Jung-gu, Seoul. Photo by Joint Press Corps

Members of the Monetary Policy Committee of the Bank of Korea, who determine the base interest rate, recently expressed significant concerns about the excessive rise in housing prices in the Seoul metropolitan area and the increase in household debt.

According to the minutes of the August Monetary Policy Committee meeting (held on August 22), released by the Bank of Korea on the afternoon of the 10th, many committee members judged that inflation has recently shown a slowing trend. However, they expressed great concern about the rise in housing prices and the increase in household debt. They noted that household debt is increasing too rapidly, posing a risk to financial stability.

One committee member emphasized, "The reason the central bank should pay policy attention to the rise in housing prices is because it affects price stability and financial stability over the medium term." He added, "Besides this, it can significantly impact the expansion of asset inequality between generations and between wage earners and non-wage earners by lowering the value of labor income relative to housing prices."

The member further noted, "For young people, if housing prices rise, the burden of principal and interest payments and increased housing costs can exacerbate economic difficulties, which may delay urgent structural reforms in our country, such as addressing low birth rates."

He stated, "Since this will negatively affect the conditions for conducting monetary policy through changes in the economic structure, it is necessary to consider the housing market significantly when implementing monetary policy."

Another committee member also expressed concern, saying, "Recently, the housing market in the Seoul metropolitan area has shown signs of overheating, and the increase in household loans has expanded, causing a growing gap from fundamentals such as income." He added, "If housing prices or household debt deviate from fundamentals, it could increase financial and economic volatility during future adjustment processes and structurally constrain consumption and growth."

He continued, "It is necessary to respond with an appropriate policy mix to prevent the long-term expansion of the housing market and household debt."

At the meeting, a total of four committee members expressed the view that "the possibility of lowering the base interest rate within three months should be kept open." This indicates that while the committee members agree on the need for a future interest rate cut, they are concerned about financial instability caused by the increase in household debt.

One member stated, "Considering that prices, which surged after the COVID-19 pandemic crisis, have entered a stabilization phase and that external factors such as the exchange rate have generally calmed, but domestic demand recovery such as consumption remains slow, conditions for shifting the monetary policy stance are being created." However, he argued, "The eased financial conditions, combined with vulnerabilities in the real estate market, have led to increases in housing prices and household debt, raising the risk of negatively impacting financial stability, medium- to long-term growth, and structural reform efforts."

Another member said, "Considering stable inflation rates, slow domestic demand recovery, and high delinquency rates in some vulnerable sectors, the environment for gradually easing the degree of monetary policy tightening has matured." However, he added, "The rapid rise in real estate prices, especially in the Seoul metropolitan area, is very concerning."