Seoul: Further interest rate cuts may be needed to support economic growth, but the timing will be determined after assessing the impact of the government's real estate measures amid continued expectations of rising housing prices, the central bank said Thursday. The Bank of Korea (BOK) made the assessment in its latest biannual monetary policy report, as it kept the benchmark interest rate unchanged for the second consecutive time last month, aiming to ensure financial stability amid rising housing prices and household debt.
According to Yonhap News Agency, the report indicated that although the economy has shown signs of improvement, it is expected to remain below its potential growth rate for the time being, necessitating additional measures to ease downward pressure on growth. The report emphasized the need to carefully determine the timing of additional rate cuts while assessing the impact of recent housing supply measures and financial conditions, given the continued upward trend in housing prices in Seoul and strong expectations for further increases.
During the rate-setting meeting late last month, five out of six board members supported the rate freeze decision, while five of them expressed the need to keep open the possibility of further rate reductions in the next three months. The BOK began its monetary easing cycle in October and has since cut the key interest rate by a combined 100 basis points, with the most recent reduction delivered in May.
BOK Governor Rhee Chang-yong has indicated that the central bank aims to avoid fueling expectations of home price increases by preventing excessive liquidity supply, highlighting that real estate prices significantly impact overall inflation. Despite tighter lending regulations, the property market remains unsettled, and apartment price growth in parts of Seoul continues to run high.
The government announced a plan earlier this week to build 1.35 million new homes in the greater Seoul area over the next five years as the latest in a series of measures to curb housing prices. The BOK report noted that monetary easing in response to low growth might alleviate short-term difficulties in South Korea, where credit is heavily concentrated in real estate. However, an overheated housing market could lead to greater financial imbalances and further weaken economic vitality and consumption capacity, necessitating a cautious approach.
The BOK expects the South Korean economy to expand by 0.9 percent this year, which is well below the country's estimated potential growth rate of 2 percent, representing the maximum pace at which the economy can grow without fueling inflation.