[Why&Next] Three Key Indicators for Future Rate Cuts from Governor Rhee's Remarks

Checkpoints for Gauging the Timing, Pace, and Magnitude of a Possible August Rate Cut
① Seoul Apartment Prices and Transaction Volume: "Has Market Sentiment Shifted?"
② End-of-July US FOMC: "Assessing Economic Outlook Beyond Rate Decisions"
③ Three Weeks of Tariff Negotiations: "Need to Monitor Not Only Korea, But Also China, EU, and Other Key Regions"

"We will continue to closely monitor the impact of household debt measures and the developments in trade negotiations." Following the Bank of Korea's decision to keep the base rate unchanged at the July Monetary Policy Board meeting, market attention has shifted to the timing and scale of the next rate cut. Based on the remarks emphasized by Governor Rhee Changyong at the press conference held after the monetary policy direction meeting on July 10, we have identified key checkpoints for gauging the pace and magnitude of future rate cuts.

Jamsil Apartment. Photo by Jo Yongjun

① Seoul Apartment Prices and Transaction Volume: "Has Market Sentiment Shifted?"

The most important indicators to watch are apartment prices and transaction volumes in Seoul and other major areas. The decision to keep the rate unchanged this month, despite a prevailing easing stance, was due to the overheating of the housing market in the Seoul metropolitan area. The resulting surge in household debt raised concerns about financial instability. At the July 10 press conference, real estate and household debt were mentioned 45 times, highlighting their importance as key topics.

Following the implementation of the government's June 27 measures, the real estate market appears to have cooled somewhat. According to the Korea Real Estate Board, the weekly increase in Seoul apartment sale prices for the first week of July (as of July 7) was 0.29%, down 0.11 percentage points from the previous week (0.40%). The upward trend in the three Gangnam districts (Gangnam, Seocho, Songpa), considered "areas of concern," as well as in the southeastern region, has slowed noticeably. Governor Rhee noted that the June 27 measures were stronger than expected and are likely to have a significant effect on household debt. He believes that if the current subdued transaction volume continues, household debt will stabilize over time.

However, he cautioned that it remains to be seen whether real estate prices can maintain their current stability, as a variety of factors beyond lending?such as market sentiment and supply?also influence housing prices. Governor Rhee assessed the current situation as "more concerning" than August of last year, when a real estate frenzy triggered a sharp rise in household debt. He stated, "The speed at which (real estate prices) are rising is faster than in August last year," adding, "In terms of severity, the current situation is even more alarming." He also suggested it may take even longer for the market to calm down compared to last year.

Until the next Monetary Policy Board meeting, apartment prices and transaction volumes in Seoul and other major regions are likely to attract more attention than ever. This is because these trends will reveal whether market expectations for further price increases have subsided. If market sentiment does not cool easily, there will likely be calls for additional government supply measures, and the Bank of Korea will face greater pressure regarding further rate cuts. Governor Rhee emphasized, "The consensus among the Monetary Policy Board members is that the pace and scale of the Bank of Korea's rate cuts should not serve as a factor that stimulates market sentiment and drives up real estate prices."

② End-of-July US FOMC: "Assessing Economic Outlook Beyond Rate Decisions"

The policy rate decision at the US Federal Reserve's Federal Open Market Committee (FOMC) meeting, scheduled for July 29-30, is also drawing attention. Not only the decision on a rate cut, but also the content of the meeting could influence the direction of Korea's base rate. While the market sees a high probability of a rate hold in July, there are differing views even within the FOMC, with figures such as Fed Governor Christopher Waller voicing support for a cut this month. Governor Rhee commented, "There seem to be significant differences of opinion among FOMC members regarding the impact of tariffs on US inflation," adding, "From our perspective, the interest rate gap is a burden, so it would be preferable if the US lowered rates in advance, but whether a cut will happen in July is highly uncertain."

Governor Rhee assessed that, amid the current weak dollar trend?which is expected to continue for the time being?Korea's reliance on US monetary policy has decreased compared to the past. However, concerns about capital outflows due to the Korea-US interest rate gap remain. At the July 10 Monetary Policy Board meeting, two out of six board members did not leave open the possibility of a rate cut within the next three months, because they were concerned about the rate gap with the US widening beyond 2.00 percentage points. Governor Rhee stated, "It's not a mechanical rule that the (Korea-US rate) gap must not exceed a certain level. While our dependence on US monetary policy has decreased significantly, it is still something we need to monitor."

③ Three Weeks of Tariff Negotiations: "Need to Monitor Not Only Korea, But Also China, EU, and Other Key Regions"

Most importantly, the outcome of the tariff negotiations with the US?which have been postponed again until August 1?is a key variable. This is because it will affect the degree of economic concerns, another central factor in determining the direction of interest rates. At the July 10 press conference, tariffs were mentioned 34 times, underscoring their importance alongside real estate and household debt.

The Donald Trump administration has officially notified that, starting August 1, it will impose a 25% reciprocal tariff on all Korean products, while leaving room for negotiations within the period. Governor Rhee stated, "Depending on the outcome of trade negotiations between the US and major countries, including Korea, our export and growth trajectories could change significantly. The most significant impact will come from the level at which reciprocal tariffs imposed on Korea and item-specific tariffs on semiconductors and other goods are set." He also emphasized the need to consider not only tariffs directly affecting Korea, but also those imposed on major competitors such as China, as well as on Vietnam, Mexico, and Canada, which are key overseas production bases for Korea.

In its economic outlook released in May, the Bank of Korea projected annual GDP growth of 0.8% for this year, assuming that basic (10%) and item-specific (25%) tariffs would largely remain in place. Subsequently, the market expected that, with the effects of the government's supplementary budget, the Bank of Korea's growth forecast could recover to around 1.0% for the year. Governor Rhee also noted that, mechanically factoring in the second supplementary budget?which is expected to raise growth by 0.1 percentage points?this year's growth rate would rise to 0.9%. However, depending on the outcome of negotiations, if reciprocal tariffs remain at 25% or increase further, expectations could be revised downward to below the previous growth forecast. In that case, concerns about low growth would intensify, increasing pressure for a base rate cut.

The worst-case scenario envisioned by Governor Rhee is a situation in which tariffs rise significantly, both directly and indirectly, while real estate prices remain uncontrolled. This would create a dilemma, as both financial stability and economic growth would require support. Governor Rhee stated, "If that happens, there will be differences of opinion among Monetary Policy Board members as to which side should take priority. Given the high level of uncertainty at present, decisions will have to be made based on the data."