Bank of Korea governor Rhee Chang Yong. — Bloomberg
SEOUL: The Bank of Korea (BoK) held its benchmark interest rate steady to avoid spurring a housing market rally that threatens to cause financial imbalances by driving mortgage debt levels higher.
The central bank held its seven-day repurchase rate at 2.5% yesterday, a decision that aligned with the expectations of 23 of 25 economists surveyed by Bloomberg, with the other two predicting a quarter-point cut.
The move extends a pause that began in July after four reductions since October last year.
Policymakers have been boxed in by persistent gains in Seoul’s property market and rising mortgage debt levels that threaten to inflame financial instability if borrowing costs fall further.
Apartment prices in the capital have climbed for 37 straight weeks as of Oct 13, despite a series of government measures aimed at reining in demand.
“With the re-acceleration in Seoul apartment prices and renewed pressure on the won, the conditions didn’t warrant easing in October,” said Bumki Son, an economist at Barclays Bank PLC.
“The focus now shifts to whether the forward guidance from the BoK opens the door to a rate cut in the next three months.”
Governor Rhee Chang Yong said in August that five board members were open to a rate cut within three months, but the bank reiterated that it would proceed only when housing-related risks show clearer signs of stabilising.
Authorities also need to keep an eye on the Federal Reserve, as any divergence in policy trajectories could kindle currency volatility.
Economist Hyosung Kwon said: “We expect the BoK to leave the door open to further cuts – likely resuming in November under our baseline, depending on how effectively the Oct 15 household-lending curbs cool the property market.”
Rhee is scheduled to brief reporters yesterday, when he is expected to outline the board’s rate path and disclose the number of dissenting votes if there were any.
Markets will watch whether he maintains guidance that easing remains on the table or flags deeper concerns about financial stability, which could push back expectations for a move.
Economists are divided over the BoK’s policy path from here, with some saying the rate-cut cycle has already run its course while others expect easing to resume once property risks cool.
Citi sees the benchmark staying at 2.5% for now as housing prices and currency pressures argue against further cuts, whereas Morgan Stanley expects the BoK to lower rates in November as new housing curbs take effect.
“We think the BoK’s cutting cycle is likely delayed, not stopped,” Kathleen Oh, Morgan Stanley’s chief South Korea economist, said in a report last week.
“The outlook for an additional rate cut next year however, appears blurred, on increased sensitivity to the housing market ahead of the local government election.” — Bloomberg
