Bank of Korea Foregoes Interest Rate Hike

The central bank of South Korea is in a holding pattern as fears over rising property prices mount.

This week, the Bank of Korea held interest rates at 2.5 percent, avoiding slashing the rates and potentially driving up housing costs in an already tight market, the Financial Times reported. The move to sit on its hands comes amid a contracting economy in the first quarter following President Trump’s tariffs hurting the country’s car, steel and electronics exports.

South Korean President Lee Jae Myung hopes to resuscitate the economy after an extended period of slowing growth, according to FT. In addition to the U.S. tariffs, the country is also facing competition from low-cost Chinese exporters and internal political turmoil following the impeachment of predecessor Yoon Suk Yeol.

In June, factory activity contracted for a fifth consecutive month. Earlier this week, Trump doubled down on South Korea’s blanket 25 percent tariff on exports if the country doesn’t strike a trade deal with the U.S. by Aug. 1.

“The BoK wants to cut rates to boost the economy, but it is concerned that lower rates will create bubbles in the property market, hurting financial stability,” Park Chong-hoon, head of research at Standard Chartered in Seoul, told FT. “The runaway property market in Seoul and high household debt are limiting their policy options.”

Rhee Chang-yong, governor of the Bank of Korea, said last month that it’s difficult to balance stimulating growth without overheating the property market. As a result, BoK is maintaining an “accommodative monetary policy stance for the time being” but he warned that “excessively lowering the base rate would likely fuel housing price hikes in the Seoul metropolitan area, rather than support a recovery in the real economy.”

To help stimulate growth in the meantime, Lee’s party passed a US$23 billion stimulus package that includes the distribution of cash vouchers ranging from US$110 to $410 to all residents. Still, many South Koreans remain fearful of their home-buying fate and are hesitant to invest their funds in the stock market instead of property, according to the report.

“People believe that property prices will go up again because they have always done so under the previous liberal governments,” said Park Jeong-woo, an economist at Tokyo-based financial services firm Nomura. “There is fear that this may be their last chance to buy a house, given the current supply shortages in Seoul. Many of them are still convinced that property investments never fail.”

— Chris Malone Méndez