[Why&Next]"Aiming for 1% Growth This Year"... November MPC Signals in Lee Chang-yong's Remarks

Optimism Grows for November Economic Outlook
Key Indicators for Next Year Show Positive Signs
Housing Price Growth Slows After 10·15 Measures
Will Market Stabilization Be Confirmed Within Four Weeks?
Real Estate, Fed Policy, and Exchange Rate

With about four weeks remaining until the final base interest rate decision of the year, the market is paying close attention to recent remarks made by Lee Chang-yong, Governor of the Bank of Korea. Experts noted that, considering both economic growth and financial stability, the likelihood of a rate freeze in November remains high. However, they emphasized that attention should be paid to how key variables evolve in the remaining period.

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Direction Decision Meeting of the Monetary Policy Committee on the 23rd of last month. Bank of Korea

Growth Rate Shows Signs of Recovery at 1%... Driven by Korea-US Negotiations and Semiconductor Exports

"There is a growing possibility that this year’s economic growth rate will exceed the Bank of Korea’s forecast of 0.9% and reach at least 1.0%." Governor Lee made this statement on October 29 during a comprehensive audit by the National Assembly’s Strategy and Finance Committee, referencing third-quarter real gross domestic product (GDP) figures that surpassed earlier projections. The Bank of Korea expects that if fourth-quarter GDP grows by between -0.1% and 0.3% compared to the previous quarter, the annual growth rate will reach 1.0%. The Bank’s growth forecast for the fourth quarter, made in August, was 0.2%.

With the recent resolution of Korea-US tariff negotiations-a key variable for fourth-quarter growth-expectations have strengthened that this year’s growth rate will exceed 1%. Governor Lee described the agreement between Korea and the United States to cap annual cash investments in the US at 20 billion dollars as "fortunate." He also praised the overall negotiations, including the 15% automobile tariff, as "very successful." These outcomes are largely in line with the Bank of Korea’s previous economic forecast assumptions. Other major variables for the fourth quarter include trends in exports, especially semiconductors, the continued strength of private consumption, and the extent of improvement in construction investment. Among these, optimism is growing as robust semiconductor exports are expected to continue, fueling a more positive outlook for growth.

The economic outlook to be released alongside the November rate decision will focus on next year’s growth forecast for Korea. The market expects that, due to this year’s base effect, the continued semiconductor supercycle, an expansionary fiscal stance, and a rally in the domestic asset market, growth of around 2.0% is possible. The Bank of Korea is also expected to raise its 2025 growth forecast from the previous estimate of 1.6% in its November revised outlook. This would ease concerns about downside risks to the economy and reduce the justification for a rate cut this month. However, the market remains wary of factors such as slowing US consumption and sluggish domestic construction activity.

View of apartment complex from Namsan, Seoul. Photo by Yonhap News Agency

Are Home Prices Stabilizing After the October 15 Measures?... A Key Variable for the Monetary Policy Committee

Whether home prices have stabilized-a key reason for previous rate freezes-remains a central consideration for this Monetary Policy Committee meeting. According to the Korea Real Estate Board, the average sale price of apartments in Seoul rose by 0.23% in the fourth week of October (as of October 27) compared to the previous week, but the increase was smaller than the previous week’s 0.50%. This is a result of the full implementation of the "October 15 Real Estate Measures," which designated all of Seoul and 12 regions in Gyeonggi Province as regulated areas, including adjustment-targeted areas, overheated speculation zones, and land transaction permit zones.

Governor Lee previously commented that the October 15 measures, which reduced the loan-to-value (LTV) ratio cap for first-time homebuyers and conditional single-homeowners in regulated areas from 70% to 40%, and lowered the mortgage loan limit for homes valued over 1.5 billion won to between 200 million and 400 million won, had "significantly reduced risks related to household debt."

However, many believe that it is still too early to conclude that market sentiment has stabilized enough to warrant a rate cut on the 27th. The market expects that price adjustments will continue for some time, but the extent of the decline will likely be limited. Due to the land transaction permit zone designation, which requires two years of actual residence when purchasing a home, supply-side sellers seeking to sell properties with existing tenants are being blocked, resulting in a transaction freeze. As a result, the number of listings is expected to decrease, limiting the magnitude of price corrections.

As of the fourth week of October (October 27), the Seoul apartment sale supply-demand index stood at 103.2, down 2.2 points from the previous week (105.4). While this is the first decline since August 18 (99.1), the index still remains slightly above the baseline, indicating a continued buyer’s market.

Fed Rate and Exchange Rate Movements, Along with Real Estate, Likely to Determine November Decision

Governor Lee has consistently stated that he will not allow an interest rate cut to fuel excessive buying sentiment in the market. He said, "It is not possible to control real estate prices through interest rate policy. That is a matter for government policy," but emphasized that "monetary policy should operate within a range that does not stimulate real estate price increases through a rate cut."

There are only three more weekly real estate market statistics to be released before the November rate decision. Choi Jemin, a researcher at Hyundai Motor Securities, commented, "It may take a longer period for price increases to stabilize, and the possibility of additional measures cannot be ruled out. The government is introducing strong policies to curb home price increases, and the Bank of Korea’s Monetary Policy Committee also agrees with this stance from the perspectives of financial stability and enhancing potential growth. Considering the consistency between government and central bank policy, it will not be easy to decide on a rate cut in November."

Meanwhile, the US Federal Reserve’s Federal Open Market Committee (FOMC) in October lowered the upper bound of its policy rate from 4.25% to 4.00%, a 0.25 percentage point reduction. As a result, the interest rate gap between Korea and the US narrowed to 1.5 percentage points. However, following the rate cut, hawkish (tightening-favoring) statements reduced expectations for another cut in December, and the continued weakness of the Korean won is also expected to weigh on the Bank of Korea’s rate cut decision. Following the conclusion of the Korea-US tariff negotiations, the won-dollar exchange rate fell to the 1,420 won level and is fluctuating between 1,420 and 1,430 won. Some in the market are concerned that, with around 30 trillion won flowing out of Korea to the US each year, the won-dollar exchange rate could become firmly entrenched at a higher level.