the Bank of Korea's monetary policy committee kept the base rate unchanged at 2.50% a year for a third straight meeting. While the need for a cut remains due to concerns about an economic slowdown, financial instability stemming from rising home prices in the Seoul metropolitan area held it back. The won-dollar rate, which surged to 1,400 won amid uncertainty over a $350 billion U.S.-bound investment fund, also played a role.
The outlook for future rate cuts has grown more uncertain. Of the six Commissioners on the monetary policy committee excluding the governor, those leaving open the possibility of a cut within three months fell from five to four. Governor Rhee Chang-yong, who had stressed that the easing cycle was not over, also cited financial instability and said the "magnitude and timing of the cut have been adjusted." The market expects the Bank of Korea (BOK) to resume cutting in the first quarter of next year.
◇ Base rate frozen at 2.50%... "Impact of overheated real estate and rising exchange rate"
The Bank of Korea (BOK) the Bank of Korea's monetary policy committee kept the base rate at 2.50% a year at its regular meeting on the 23rd. The decision won support from all five members (excluding the governor) except Commissioner Shin Seong-hwan, who called for a 0.25 percentage-point cut. After two cuts in Oct.–Nov. last year lowered the base rate to 3.00%, the BOK alternated between cuts (February and May) and holds (January and April) this year, then kept rates unchanged for three straight meetings since July.
The key variable in this decision was the rise in home prices. According to the Korea Real Estate Board (REB) released on the 16th, weekly apartment price trends nationwide for the second week of Oct. (as of the 13th) showed that Seoul sale prices rose 0.54% from two weeks before the Chuseok holiday, with the increase widening by 0.13 percentage points. More consumers also expect home prices to rise. According to the Bank of Korea (BOK) survey, last month's housing price outlook index came in at 112, up 1 point from the previous month.
Governor Rhee Chang-yong said rising home prices are fueling financial instability. At a press conference right after the monetary policy committee meeting, Rhee said, "Home prices in the Seoul metropolitan area are high for maintaining social stability," adding, "With the government's regulatory policies (such as the Oct. 15 measures), household debt risks have disappeared, but to translate that into financial stability, we need to see signs of growth slowing."
Turbulence in the foreign exchange market also hampered cuts. Since the end of last month, the won-dollar closing rate has topped 1,400 won, showing strong gains. As differences emerged between Seoul and Washington over the $350 billion U.S.-bound fund, exchange-rate volatility grew, and more recently it tracked the weaker yen following the launch of the Sanae Takaichi cabinet in Japan, breaking through the 1,440-won level intraday.
Rhee said, "Since the August meeting on the currency policy stance, the exchange rate has risen 35 won in a month, of which a quarter was due to dollar strength, while the remaining three quarters depreciated due to domestic factors, including concerns about sourcing $350 billion," adding, "Beyond a strong dollar, domestic factors played a large role in the depreciation."
Commissioners' outlook on rates also turned more hawkish. Of the six Commissioners excluding the governor, four said the possibility of lowering the base rate below 2.50% within three months should be kept open. Compared with a month earlier, the number of Commissioners expecting cuts fell by one, while those expecting a hold rose by one.
On this, Rhee said, "The number of Commissioners keeping the possibility of a cut open falling from five to four means more focus on financial stability," adding, "For financial stability, I think we need to see signs that the rise in real estate prices is slowing."
◇ Likelihood of a November hold also rises… Hobbled by tariff talks and real estate
In the market, the prevailing view is that the Bank of Korea (BOK) will not cut the base rate within the year. If this scenario materializes, the BOK will have lowered the base rate once (by 0.25 percentage point) in May this year, then kept the previous level for four straight meetings. The last monetary policy committee meeting of the year will be held on the 27th of next month.
Jo Yong-gu, a researcher at Shinyoung Securities, said, "If tariff negotiations (with the United States) go well, the won-dollar rate will fall, exports will improve, and there could be an upward revision to growth forecasts, which would prompt talk of 'is there a need to cut rates,'" adding, "Conversely, if the conclusion is unfavorable to us, the won-dollar rate will rise and rates will not be cut."
Yun Yeo-sam, a researcher at Meritz Securities, said, "The fact that forward guidance retreated even from the August monetary policy committee meeting reflects, as Rhee said, that 'adjustments to the timing and magnitude of cuts are inevitable.'" Right after the meeting, Rhee said at a press conference, "From a growth perspective, I think it is necessary to continue the rate-cutting stance," but added, "Financial stability risks have also grown, so we will decide the timing and magnitude of additional base rate cuts as we watch the data."
The lack of visible effects from real estate measures also supports the BOK's cautious stance. According to the BOK's analysis, in the 10 weeks after the June 27 measures, Seoul apartment sale prices rose 0.1%. Considering that apartment sale prices in Seoul rose 0.03% in the 10 weeks after the real estate measures announced under the Moon Jae-in and Yoon Suk-yeol administrations, the current administration's measures have had little effect.
Kim Ji-na, a researcher at Eugene Securities, said, "With a six-week gap between the Oct. 15 policy (centered on curbing sales with jeonse tenants) and the November monetary policy committee meeting, it is premature to discuss the policy's effect," adding, "Given that it is difficult to calm real estate prices in the short term, the next cut is expected in the first quarter of next year." Rhee also said that day, "I don't think the upward trend (in real estate prices) will break quickly."
Some still said a November cut cannot be ruled out. Baek Yun-min, a researcher at Kyobo Securities, said, "Uncertainty about the economy persists, with the GDP gap (the difference between real GDP and potential GDP) expected to remain negative next year," adding, "The need for monetary policy easing has not disappeared."