South Korea: Presidential office expresses disappointment over BOK’s rate freeze

Seoul, Aug 22 – The Presidential office expressed disappointment over the Bank of Korea’s decision to freeze the key rate at 3.5 per cent on Thursday, citing concerns over its impact on domestic consumption.

“The interest rate decision lies within the authority of the Monetary Policy Board, but it is disappointing from the perspective of boosting domestic command,” a senior presidential official said in a remark on the rate decision, Yonhap news agency reported.

The official said the government will announce measures next week to address domestic demand, including ensuring the supply of essential goods for the Chuseok holiday.

The BOK has kept the policy rate unchanged since February last year but signalled a policy pivot this year amid moderating inflation and a slower-than-expected economic outlook.

South Korea’s central bank froze its key rate for the 13th straight session on Thursday due to soaring home prices but may start a policy pivot this year amid moderating inflation and a slower-than-expected economic outlook.

The BOK has continued to stand pat following rate freezes since February last year after delivering seven consecutive rate hikes from April 2022 to January 2023.

The central bank said inflation has continued its downward trend and the recovery in domestic demand has been modest.

But it still needs to further monitor how recent measures over the housing market are affecting home prices in Seoul and its surrounding areas and household debt, the BOK said in a statement.

“The board sees that it is appropriate to maintain its current restrictive policy stance,” it said, adding that it will also examine the proper timing of rate cuts.

The rate freeze came as household debt runs high in the face of a series of lending rate hikes and with tighter lending rules and inflationary pressure in Asia’s fourth-largest economy showing signs of easing.

BOK Governor Rhee Chang-yon said rising household debts and home prices should be dealt with immediately to ensure financial stability.

“Household debt should be considered for financial stability, and most board members see the need to curb rising real estate prices,” Rhee said in a press conference.

The BOK chief said four board members opened the door to a potential rate cut within three months, more than the two members in July.

“Board members shared the view that any potential rate cut would come after government measures to rein in home prices work out,” Rhee said.

Earlier, the central bank said conditions are ripening for a policy pivot, although it remains vigilant against soaring household loans.

The country’s top five lenders had already extended 4.18 trillion won ($3.12 billion) in household loans, mostly home-backed loans, in the first 14 days of this month, already higher than the previous month’s 5.5 trillion won rise.

In the second quarter of the year, outstanding household credit reached a record 1,896.2 trillion won, up 13.8 trillion won from three months earlier, rebounding from the previous quarter’s 3.1 trillion won fall, according to the central bank data.

“It is essential to assess the impact of government measures concerning the housing market and the increased market volatility because housing prices in the Seoul area continue to rise, and household debt persists in its increase,” the central bank added.

South Korea’s inflation picked up pace in July on high prices of fruits and petroleum products, though it stayed below 3 per cent for the fourth consecutive month.

Consumer prices, a key gauge of inflation, rose 2.6 per cent on-year last month, compared with a 2.4 per cent increase a month earlier, marking the first time in six months that the price growth accelerated.

“Looking ahead, inflation is expected to continue its slowing trend, owing to the base effect from the sharp rises in global oil and agricultural product prices last year and due to modest demand pressure,” the bank said.

The rate freeze also came as the central bank trimmed its growth projection for the year to 2.4 from its outlook of a 2.5 per cent expansion estimate in May.

In May, the central bank jacked up its growth estimate to 2.5 per cent for the year, up from its earlier projection of 2.1 per cent, but slashed the 2025 growth outlook to 2.1 from 2.3 per cent.

The country’s exports are projected to increase 6.9 per cent this year, higher than its earlier estimate of 5.1 per cent, and private spending is likely to gain 1.4 per cent this year, slowing from its earlier projection of a 1.8 per cent advance.

Construction investment is forecast to contract 0.8 per cent this year, compared with an earlier estimate of a 2 per cent dip.

The country’s current account surplus is expected to increase to $73 billion from an earlier estimate of $60 billion, according to the central bank.

The bank cut its inflation outlook to 2.5 per cent for the year, from its earlier estimate of 2.6 per cent.

Last year, the economy expanded 1.4 per cent, slowing from the previous year’s 2.6 per cent gain and the 4.1 per cent advance in 2021.

The central bank’s rate freeze followed the Federal Reserve’s decision early this month to hold its benchmark lending rate steady at between 5.25 per cent and 5.50 per cent for the eighth consecutive time.

Its chair said a rate cut could be “on the table” as soon as September if conditions are met.