BOK's Rate Dilemma: Why Surging Home Prices and Weaker Won Force Policy Pause

In a widely expected decision, the Monetary Policy Board of the Bank of Korea (BOK) held its key rate steady at 2.5 per cent during its rate-setting meeting in Seoul, reports Yonhap news agency.

It marked the third consecutive on-hold decision, though the BOK has stressed the need to support the economic recovery through monetary easing.

"It is necessary to further monitor financial stability conditions, such as the effects of real estate market stabilisation measures on housing markets in Seoul and its surrounding areas and on household debt, as well as exchange rate volatility," the BOK said in a released statement.

Five out of the board's six members supported the rate freeze decision, while four of them voiced the need to keep open the possibility of further rate reductions in the next three months, BOK Gov. Rhee Chang-yong told a press briefing.

The central bank began its monetary easing cycle in October last year, cutting the key interest rate by a total of 100 basis points since then, with the most recent reduction implemented in May.

But its policy room has been limited as surging home prices in Seoul and nearby areas have fueled household debt.

"Real estate prices in Seoul and the greater Seoul area are too high, considering income levels and the need to maintain social stability ... I believe current real estate prices are eroding economic growth," Rhee said.

"Economic growth remains low and the current environment does not really allow for a rate freeze. But the reduction in borrowing costs could accelerate the real estate market. By keeping rates on hold, we signal that the pace and magnitude of a rate cut would likely be gradual," he added.

The median expectation is now for an additional rate cut in November before a prolonged pause.

The government has rolled out a series of measures to cool the real estate market. Most recently, the government designated 21 additional districts in Seoul as speculative zones, bringing all 25 districts in the capital under tougher regulations.

It also tightened lending rules, lowering the mortgage loan cap to as little as 200 million won (US$139,600) from 600 million won set in June.

Outstanding household loans extended by South Korean banks have continued to rise, reaching a record high of 1,170.2 trillion won at the end of last month, though their growth has slowed due to stricter regulations.

The country's household debt-to-GDP ratio stood at 89.7 percent as of end-June, up 0.3 percentage point from three months earlier, marking the first on-quarter increase in the ratio in 15 quarters.

The won's slide has also been a key concern for policymakers.

The local currency has fallen well below 1,420 per dollar, its lowest level in months, amid the continued strength of the U.S. dollar and uncertainties surrounding tariff negotiations with the United States, and a rate cut could further weaken the won and trigger capital outflows.

The local currency opened at 1,431.8 per dollar Thursday, down 2 won from the previous session.

"I expect the currency to ease somewhat if tariff talks are concluded and uncertainty diminishes. But we need to see specifics regarding the pledged $350 billion in investment funds, among other details," Rhee said. "Our focus is not on the level itself, but on curbing volatility."

In July, Seoul and Washington reached a framework deal in which the U.S. would impose a 15 percent tariff on South Korean goods, rather than the initially threatened 25 percent, while Seoul would create a $350 billion fund for U.S. investments.

- IANS