Housing prices, debt should be under control for further monetary action

(News1)

The Bank of Korea (BOK) on Thursday kept its base interest rate steady at 2.5 percent during its first Monetary Policy Board meeting of the second half of the year.

Despite growing calls for a rate cut due to domestic demand stagnation and projections of near-zero economic growth, the central bank’s decision was made amid surging housing prices in the Seoul metropolitan area and rising household debt.

The bank appears to have concluded that lowering rates before the effects of the June 27 lending regulations are fully realized could fuel expectations of further housing price increases and accelerate the pace of household debt growth.

The BOK is expected to weigh the timing of a rate cut while monitoring the impact of lending regulations, the third-stage stress-based debt service ratio (DSR) rules, the execution of the government’s supplementary budget, and the outcome of the upcoming U.S. Federal Open Market Committee (FOMC) meeting.

BOK Governor Rhee Chang-yong also identified housing prices and household loans as the primary factors behind the decision to hold rates steady.

“The recent spike in real estate prices has already reached a critical level that restricts both consumption and economic growth,” Rhee said. “The policy priority must be to stabilize expectations to prevent further rises in metropolitan home prices and to manage household debt even at the expense of boosting the economy.”

Amid soaring home prices this year, household loans from domestic banks rose by 6.2 trillion won ($4.51billion) in June compared to the previous month, marking the largest monthly increase in 10 months.

In particular, mortgage loans jumped by 5.1 trillion won in just one month.

Price stability also remains uncertain.

While the consumer price index (CPI) rose 2.2 percent last month, which is not yet alarming, factors such as supplementary budget spending and ongoing heatwaves continue to exert upward pressure on inflation.

The economy continues to weaken while monetary authorities hesitate to lower rates.

Consumption and investment remain sluggish, with additional risks mounting, including a potential contraction in exports due to U.S. tariffs.

Both domestic and international institutions, including the BOK, are also issuing forecasts of near-zero economic growth.

A rate cut is clearly needed to stimulate the economy, and the central bank has left the door open for another cut within the year.

However, unless housing prices and household debt are brought under control, the room for monetary policy action remains limited.

Ultimately, taming housing prices, household debt, and inflation has become a prerequisite for any effective economic stimulus.