Seoul: South Korea's central bank kept its benchmark interest rate unchanged for the second consecutive time Thursday in a bid to ensure financial stability amid persistent concerns about rising housing prices and household debt. In a widely expected decision, the Monetary Policy Board of the Bank of Korea (BOK) held its key rate steady at 2.5 percent during its rate-setting meeting in Seoul.
According to Yonhap News Agency, this decision marks the second consecutive on-hold decision, although the BOK has emphasized the need to support economic growth. The central bank began its monetary easing cycle in October and has since cut the key interest rate by a total of 100 basis points, with the most recent reduction delivered in May.
Thursday's decision underscores the BOK's focus on maintaining financial stability, as the property market remains unsettled, and apartment price growth in parts of Seoul continues to run high despite tighter lending regulations. Related data from the Korea Real Estate Board indicates that apartment prices in Seoul climbed 0.14 percent in the first week of this month, accelerating from a 0.12 percent gain the week before. However, the increase has somewhat slowed to a 0.09 percent gain in the third week of this month.
In an effort to curb soaring housing prices, authorities imposed a 600 million-won (US$431,769) cap on mortgage loans for property purchases in the capital region in late June and suspended home-backed loans for multi-homeowners. Tighter debt-service-ratio (DSR) regulations have also been applied to nearly all types of household debt since July.
Following these measures, household loans extended by major South Korean banks grew at a slower pace in July compared to the previous month. However, officials have warned that the pace could pick up again amid a rise in home transactions. The decision to hold rates steady also reflects concerns over the widening interest rate gap with the United States.
The gap has stood at a record high of 2 percentage points since the latest rate reduction by the BOK in May. A wider gap may increase the risk of a weakening Korean won and potential capital outflows by foreign investors. Additionally, signs of recovery in private consumption, partly driven by the government's implementation of a supplementary budget and a tariff deal with the U.S., have somewhat eased uncertainties, supporting the BOK's rate freeze decision.
Given these factors, the BOK appears to have chosen a wait-and-see approach before delivering another rate cut, despite its earlier emphasis on supporting economic growth. The bank is closely monitoring trends in household borrowing and housing prices, as well as the Federal Reserve's rate decision in September and developments surrounding new U.S. tariff policy measures.
Citing the effects of the government's economic stimulus measures, the BOK on Thursday raised its economic growth outlook for the country this year by 0.1 percentage point to 0.9 percent.