Bank of Korea Keeps Rates Steady

Source Credit : CNBC

South Korea’s central bank held its policy rate at 2.5% Thursday, as it assesses the impact of recent measures aimed at cooling Seoul’s housing market.

Housing prices in Seoul spiked over 19% in June on an annualized basis, according to Goldman Sachs, prompting financial authorities to step in with measures to address rapidly expanding household loans.

The Bank of Korea noted a “significant acceleration in housing prices in Seoul and its surrounding areas, [as well as] household debt.”

The central bank had lowered rates in its last policy meeting in May at a time when the country was in the midst of a political turmoil while also facing steep tariffs on auto and steel exports from the U.S.

While South Korea’s economy contracted by 0.2% quarter on quarter in the first three months of this year amid softening exports growth and weak construction activity, the bank chose to keep rates steady, prioritizing financial stability over growth concerns.

“Financial stability is an actual mandate for the BOK unlike many of its peers, and Governor Rhee [Chang Yong] has been sounding alarms about household debt,” said Homin Lee, senior macro strategist at Swiss private bank Lombard Odier. Household debt has risen substantially over the past few months, he added.

The central bank is, however, expected to cut rates in its next policy meeting as measures to cool the housing market in Seoul take effect. Goldman Sachs said in a note last week that the introduction of new mortgage lending restrictions would “open the door” for a rate cut in the BOK’s August meeting.

Lee forecasts that the BOK will cut rates twice this year — most likely in August and November — as core inflation in South Korea is on target and the won has stabilized against the dollar, but the bank will likely opt for an “extended hold” after these two cuts due to household debt concerns.