The Bank of Korea's Monetary Policy Committee kept the base rate steady at 2.50% annually, continuing its wait-and-see stance following July. This decision appears to be influenced by a desire to observe the effects of the government's stringent household loan regulations before weighing the timing for a rate cut. The upcoming decision on whether the U.S. will lower interest rates on Sept. 17 (local time) was also likely considered.
The Bank of Korea's Monetary Policy Committee (hereinafter referred to as the Monetary Policy Committee) held a regular meeting on the 28th and decided to maintain the base rate at 2.50% annually. The Bank increased the base rate from 0.5% to 3.5% from August 2021 to January 2023 and kept it steady for 1 year and 7 months. After cutting rates in October and November of last year, it has alternated between holding steady (January, April, July) and cutting rates (February, May) this year.
Expectations about this Monetary Policy Committee decision were mixed in the market, but as the date approached, a 'hold' was relatively favored. A survey conducted by the Korea Financial Investment Association among 100 people engaged in bond management and operations between the 18th and 21st showed that 84% of respondents anticipated a rate freeze. This figure is a decrease of 9 percentage points from the previous survey conducted in July.
The main rationale for the freeze in the market is the anticipation that the Bank of Korea will continue to monitor the trends in the Seoul real estate market and household debt. Consumer expectations for rising home prices have rebounded just one month after the government initiated stringent regulations, including lowering the housing loan limit to 600 million won in June.
The transaction prices of apartments in Seoul rose by 0.14% in the first week of August, an increase of 0.02 percentage points compared to the previous week (0.12%). After five consecutive weeks of a slowing pace of increase following the real estate policy announcement in June, the increase has slightly expanded for the first time in six weeks. In the second and third weeks of August, the pace of increase narrowed again to 0.10% and 0.09%, but the price uptrend in preferred complexes continues. As of July 7, the outstanding balance of household loans at the five largest banks rose to 760.88 trillion won, an increase of 1.91 trillion won compared to the end of the previous month. This averages 2.7 billion won daily, more than double the daily average of 1.3 billion won seen in July when the increase rate had slowed.
The unprecedented two percentage point gap between South Korea and U.S. interest rates is expected to act as a burden in making a decision to lower rates. While the U.S. Federal Reserve is likely to lower its policy interest rate in September, there remains a need to monitor labor market and inflation indicators, indicating that further observation is required. The preemptive cut by the Bank of Korea could lead to the outflow of foreign capital and a currency exchange rate in the 1,400 won range.
However, there is also a possibility that rate cuts may resume in the future. Analysts suggest that lowering rates in line with the implementation of the supplementary budget could maximize the effects of monetary policy.
The intensification of the U.S. tariff policy is also raising the necessity for a rate cut due to sustained downward pressure on the economy. Following the conclusion of the Korea-U.S. tariff negotiations at the end of last month, U.S. President Donald Trump indicated that he could impose tariffs of up to 100% on semiconductors, Korea's largest export item.
The government projected the real Gross Domestic Product (GDP) growth rate for this year at 0.9% in the 'New Government Economic Growth Strategy' announced on the 22nd. This is a downward revision of 0.9 percentage points from the 1.8% projected in the economic policy direction earlier this year. This forecast does not account for tariffs on items such as semiconductors that the U.S. has indicated, leaving export uncertainties still in place.
Jo Yong-gu, a researcher at Shinyoung Securities, stated, 'After assessing the external risk factors related to the resumption of rate cuts by the U.S. Federal Open Market Committee (FOMC) in September and Trump's tariff policy, I expect that a rate cut will occur at least once within this year.'