BOK chief signals rate cut; warns of rising housing prices

The time is ripe to prepare an interest rate cut as consumer prices are holding around South Korea’s target of 2%. But it remains uncertain when it will start lowering its base rate due to rising housing prices, household debt growth and the softer Korean won, Bank of Korea (BOK) Governor Rhee Chang-young said on Thursday.

"Conditions are ripe to change lanes and prepare to shift direction (for monetary policy) at the appropriate time," he said.

It is the first time for the central bank to officially give a mention of a rate cut in almost three years after it switched to a tightening stance with an interest rate hike in August 2021.

His remarks came after the central bank unanimously decided to keep interest rates unchanged at 3.50% for the 18th straight month, the longest streak of unchanged interest rates since a 25-basis-point (bp) hike in January of last year.

“Two out of six members (on the Monetary Policy Board), excluding me, think that we should leave open the possibility of lowering the base interest rate within the next three months.”

The other four expressed the opinion to leave rates at 3.5% for the next three months, Rhee added.

FINANCIAL STABILITY

The BOK is now taking more consideration of financial market stability over inflation in determining the timing of its first rate cut in four years.

“Although much progress has been made in stabilizing inflation, there is a need to further monitor the foreign exchange market, rising housing prices and household debt growth,” Rhee noted.

South Korea’s headline consumer prices stayed at 2.4% in June, near the BOK’s target of 2%. But housing prices in the Seoul Metropolitan Area rose at a sharper pace than the BOK had forecast in May. Rhee said the central bank took faster-than-expected housing price increases more seriously than it did in May.

Its seven rate-setting committee members shared the view that excessive liquidity supply or sending a wrong signal of a rate cut timing could trigger housing price hikes.

“A majority of monetary policy board members believe the current market expectations for a rate cut are overdone, considering current prices and financial market conditions,” said the governor.

The yield on three-year treasury bonds fell to 3.1%, pricing in one rate cut within the year. The Korean won opened domestic trade at 1,381.9 against the dollar, versus Wednesday’s close of 1,384,7.





In March 2020, the BOK shifted to a monetary easing policy by slashing interest rates by 50 bps following the COVID-19 onset. In August 2021 it turned dovish and has since raised interest rates gradually to 3.50%.

In June, South Korea’s household debt added by 6 trillion won ($4.4 billion), taking its first-half debt growth to 20.5 trillion won, its biggest increase for a six-month period in three years.

In a survey of 20 economists conducted by The Korea Economic Daily on Wednesday, half of them predict the BOK will likely make its first rate cut in four years in October, in the wake of a rate cut by the US Federal Reserve around September.

However, Federal Reserve Chair Jerome Powell on Tuesday quashed hopes of an imminent rate cut. At a Senate Banking Committee hearing, Powell said that more good data could open the door to interest rate cuts, citing the cooling labor market and stubbornly high inflation.

Lee Seung-heon, a former deputy governor of BOK, said in the poll that the BOK is in no rush to lower interest rates, which could lead to increased housing prices and household debt.

He served as a Monetary Policy Board member until August of last year, in his three years before retirement. Lee bet on a rate cut in November of l this year, but said the timing could even be pushed back to next year.

Write to Jin-gyu Kang at joseph@hankyung.com

Yeonhee Kim edited this article.