Despite Caution on Pace, Market Bets on Rate Cuts

Despite Bank of Korea's Rate Freeze, Market Rates Fall
Strong Warning: "Rates Will Only Drop if Home Prices Stabilize"
Market Interprets as Dovish, Expects One or Two Rate Cuts

The Bank of Korea, which kept its base rate unchanged in July, expressed strong caution regarding the rise in household debt and housing prices, suggesting the possibility of a more gradual approach. However, the market interpreted the central bank's stance as more dovish than expected and placed greater weight on the possibility of one or two additional rate cuts this year. Market interest rates also responded by falling preemptively.

Lee Changyong, Governor of the Bank of Korea, is answering reporters' questions at a press conference on the monetary policy committee's interest rate decision held at the Bank of Korea in Jung-gu, Seoul on July 10, 2025. Photo by Joint Press Corps

According to the bond market on July 11, the yield on three-year government bonds closed at 2.433% per annum, down 0.045 percentage points from the previous trading day. The yield on five-year bonds fell by 0.044 percentage points to 2.592% per annum. The yield on ten-year bonds also declined by 0.04 percentage points, ending at 2.814% per annum.

It is considered unusual for market interest rates to fall even though the Monetary Policy Committee of the Bank of Korea kept the base rate unchanged at 2.50% per annum. In particular, the Bank of Korea emphasized its strong caution against additional rate cuts, stating, "Household debt has already reached a critical level that constrains consumption and growth," and "Even if economic stimulus starts somewhat late, managing expectations for rising home prices and household debt is a key policy priority."

Nevertheless, the decline in market interest rates is interpreted as a result of many investors expecting the central bank to resume rate cuts within the year. The strong warning message regarding housing prices and household debt was instead read as a signal that "as long as there are no sharp fluctuations in home prices, there is room to cut rates."

In fact, while the Bank of Korea kept the base rate unchanged due to concerns about an overheated real estate market and a rapid surge in household debt, it also stated in its monetary policy decision statement that it remains in a rate-cut cycle. At a press conference, Governor Lee Changyong said, "We cannot look only at real estate prices. We must also prepare for the possibility that growth could fall further due to Trump tariffs." He also said that even considering the growth-boosting effects of the second supplementary budget, achieving growth in the 1% range this year remains uncertain. In the forward guidance, which reflects the rate outlook of the Monetary Policy Committee members over the next three months, four members mentioned the possibility of a rate cut.

For this reason, market participants assessed Governor Lee's comments as more dovish than expected. Gong Dongrak, a researcher at Daishin Securities, said, "Given that the remarks were made with the recognition that real estate issues will become the most significant challenge, the July meeting of the Monetary Policy Committee was somewhat closer to a dovish monetary policy event," adding, "Even though concerns over financial stability have recently become more prominent and urgent, the central theme was still clearly focused on the economy."

In the market, the dominant view is that there will be one or two additional rate cuts within the year. Kang Seungwon, a researcher at NH Investment & Securities, said, "The current situation is similar to August last year. At that time, even though confidence in an economic slowdown grew, the central bank kept rates unchanged to monitor the real estate market, and then proceeded with consecutive rate cuts at the following Monetary Policy Committee meetings in October and November." He added, "It is highly likely that the increase in loans in July will shrink, and among the economic slowdown risks the Bank of Korea is monitoring, the risk of tariff hikes is highly likely to materialize. Considering this, there is a strong possibility of a rate cut in August." Yoon Yeosam, a researcher at Meritz Securities, predicted, "The possibility of halting rate cuts, as some have recently argued, is low."