"Focus Placed on Household Debt Burden"... Bank of Korea Holds Rate Steady in July (Update)

Soaring Real Estate Drives Surge in Household Debt... Focus on Financial Stability This Month
Household Debt Expected to Rise Through July and August... Assessing the Impact of Government Measures
Responding to Low Growth Concerns and Supplementary Budget Implementation
"Adjusting the Pace of Rate Cuts"

On July 10, the Monetary Policy Board of the Bank of Korea decided to keep the base interest rate unchanged at 2.50% per annum. At this meeting, the focus was placed more on curbing the recent surge in household debt, rather than easing downward pressure on the economy caused by concerns over low growth in the 0% range this year. The Bank of Korea intends to prioritize financial stability by maintaining the current rate this month and monitoring the effects of the June 27 household loan management enhancement measures. Going forward, the Bank will also consider both domestic and external factors, such as the implementation of the government's supplementary budget and the US policy rate decisions, as it adjusts the pace of future rate cuts.

Lee Changyong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Direction Decision Meeting held at the Bank of Korea headquarters in Jung-gu, Seoul on the 10th. Bank of Korea

The Monetary Policy Board announced at its meeting held at the Bank of Korea headquarters in Jung-gu, Seoul, that it would keep the base rate steady at 2.50% per annum. This result is in line with market expectations. In a previous Asia Economy expert survey, all 16 respondents had predicted a rate freeze for this month.

The key factor behind this month’s decision to hold rates was household debt. In the first half of this year, the total outstanding household loans in the financial sector increased by 21.7 trillion won. Household loans surged, especially in the form of mortgage loans, as apartment transactions increased due to an overheated real estate market in Seoul and other metropolitan areas. The monthly increase in household loans has been growing, from 5.3 trillion won in April to 5.9 trillion won in May and 6.5 trillion won in June. The rise in housing transactions following the lifting of land transaction permit zones in Seoul in February, with a time lag, impacted household loans. Additionally, demand for loans surged ahead of the implementation of the third-stage stress debt service ratio (DSR) regulations.

The sharp concentration of assets in real estate in Korea means that a surge in household debt driven by a real estate boom poses a significant constraint on monetary policy operations. The Monetary Policy Board judged that further rate cuts following the reduction in May could stimulate expectations among prospective homebuyers, thereby fueling both housing prices and household debt in Seoul and the surrounding metropolitan area. The Bank of Korea expects that the surge in housing transactions in May and June will continue to drive up household loan growth through July and August. Yoon Yeosam, a researcher at Meritz Securities, commented, "With the recent volatility in real estate prices in the metropolitan area, concerns over financial stability, such as the increase in household debt, have strengthened the case for a cautious approach to rate cuts."

Lee Changyong, Governor of the Bank of Korea. Photo by Joint Press Corps

Concerns about economic growth persist. However, this month, there is an analysis that the Bank of Korea had room to pause and observe the progress of the government's fiscal expansion policy. Previously, Lee Changyong, Governor of the Bank of Korea, stated that this year’s supplementary budget could raise the growth rate by 0.2 percentage points. Park Jungwoo, an economist at Nomura Securities, pointed out, "The supplementary budget of the new administration and other factors that can offset downward pressure on the economy have created conditions for the Bank of Korea to focus more on financial stability, such as the Seoul real estate market and household debt, rather than on economic growth."

The historically high interest rate gap between Korea and the US also acted as a burden. After the rate cut in May, the gap with the upper end of the US policy rate widened to 2.00 percentage points. Experts believe that with the US Federal Reserve likely to hold rates steady at the July Federal Open Market Committee (FOMC) meeting, it would have been difficult for the Bank of Korea to proceed with another rate cut.

The Bank of Korea is expected to adjust the pace of rate cuts while monitoring the effects of the June 27 measures and the third-stage stress DSR regulations. Since switching to a rate-cutting cycle with a reduction in October last year?the first in three years and two months?the Monetary Policy Board has cut rates a total of four times, in November last year and in February and May this year. In the market, the prevailing view is that the final rate for this year will be 2.25% per annum. This would be reached with one additional 0.25 percentage point (25 basis points) cut from the current rate.