Seoul: South Korea's central bank decided to keep its benchmark interest rate unchanged at 2.5 percent on Thursday, amid concerns over rapidly increasing housing prices, growing household debt, and uncertainties related to the United States' tariff policy.
According to Yonhap News Agency, the Bank of Korea (BOK) held its key rate steady during a meeting of the Monetary Policy Board in Seoul, following a rate cut in May aimed at supporting economic growth amidst sluggish domestic demand and the impact of U.S. tariff measures.
BOK Governor Rhee Chang-yong emphasized that household debt had reached a critical level, significantly constraining consumption and growth. He stated that cooling expectations for further rate cuts is a key policy priority to manage household debt better and prevent a rapid increase in housing prices in the Seoul area.
The decision to hold the rate was unanimous, although four out of six board members expressed the need to consider further rate reductions within the next three months. The BOK's decision highlights its focus on maintaining financial stability despite ongoing pressure to bolster economic growth.
Housing prices in Seoul and surrounding areas have surged due to easing financial conditions and expectations of further price increases under the new liberal government. Household loans from South Korean banks increased by 6.2 trillion won (US$4.51 billion) in June, the largest monthly gain since August 2024, with the BOK expecting this trend to continue.
In response, the government tightened mortgage regulations last month, capping loans for home purchases in the capital region and suspending loans for multi-homeowners. President Lee Jae Myung indicated potential additional measures to increase housing supply and further regulate the market to curb speculation.
BOK board members also considered risks from the unpredictable U.S. tariff policy. Rhee noted the potential impact on South Korea's economic growth path, highlighting that tariffs not only affect South Korea but also countries where South Korean companies have significant manufacturing operations.
U.S. President Donald Trump has pledged to impose 25 percent tariffs on South Korea beginning Aug. 1, with no further deadline extensions promised. The Seoul government is actively negotiating with the U.S. to prevent these tariffs.
The BOK's decision to maintain the rate allows time to assess the impact of the government's supplementary budget, which includes a recently passed extra budget of 31.8 trillion won aimed at stimulating the economy. This follows a 13.8 trillion-won stimulus approved in May, with the second supplementary budget expected to boost GDP growth by 0.1 percentage point.
The BOK also considered the interest rate gap between South Korea and the U.S., which currently stands at up to 2 percentage points, as further widening could increase foreign exchange market volatility.
Federal Reserve Chair Jerome Powell's cautious approach to U.S. interest rate adjustments, based on the resilience of the U.S. economy and various uncertainties, was also a factor in the BOK's decision.
Rhee warned of a potential "bad-case scenario" where U.S. tariffs increase sharply while household debt remains under control, but housing prices are unchecked, potentially worsening the trade-off between financial stability and growth.
The BOK began its current monetary easing cycle in October, having cut interest rates by a cumulative 100 basis points since then.