Why Did BOK Maintain Key Rate Amid Household Debt and US Tariffs?

Seoul, July 10 (NationPress) The central bank of South Korea has decided to maintain its benchmark interest rate on Thursday, adopting a careful stance due to concerns over soaring housing costs, increasing household debt, and uncertainties related to tariff policies from the United States.

In a decision that many anticipated, the Monetary Policy Board of the Bank of Korea (BOK) kept its key rate at 2.5 percent during a meeting held in Seoul, according to the Yonhap news agency.

This decision follows a rate cut in May, where the BOK reduced the policy rate by 25 basis points to stimulate economic growth in light of sluggish domestic demand and uncertainties from the U.S. tariff measures.

BOK Governor Rhee Chang-yong emphasized during a press conference that household debt has escalated to a level that severely limits consumption and growth. He noted, 'Cooling expectations for a rate cut is essential to prevent a rapid increase in housing prices in the greater Seoul area and to better control household debt.'

The decision to hold rates was unanimous, though four out of the six board members expressed the need to keep the option for further rate cuts open in the next three months, according to Rhee.

Thursday's decision highlights the BOK's commitment to ensuring financial stability, despite the ongoing pressure to foster economic growth.

Housing prices in Seoul and surrounding areas have surged, driven by looser financial conditions and expectations of further increases under the new liberal government.

In June, household loans provided by South Korean banks increased by 6.2 trillion won ($4.51 billion), marking the highest monthly rise since August 2024. The BOK anticipates this upward trend to persist in the upcoming months.

In response to this situation, the government has implemented stricter mortgage regulations, capping mortgage loans for home purchases in the capital region at 600 million won and suspending loans backed by homes for multi-homeowners.

President Lee Jae Myung has indicated the possibility of additional measures to increase housing supply and further regulate the market to curb speculation.

Rhee pointed out, 'Our economic growth trajectory could shift significantly based on the outcomes of tariff negotiations with the U.S.' He elaborated that the economy will be influenced not only by the tariffs imposed on South Korea but also by those affecting other countries where South Korean companies maintain significant manufacturing operations, such as China, Vietnam, Mexico, and Canada.

U.S. President Donald Trump has vowed to implement 25 percent reciprocal tariffs on South Korea starting August 1, asserting that no further extensions will be granted. The Seoul government is actively negotiating with the U.S. to prevent these tariffs.

This decision to maintain rates allows the central bank time to evaluate the effects of the government's supplementary budget.

Recently, the National Assembly approved an extra budget of 31.8 trillion won aimed at stimulating the economy and supporting citizens' livelihoods. This new initiative follows a 13.8 trillion-won stimulus package approved in May.

The second supplementary budget is predicted to enhance GDP growth by 0.1 percentage points, according to the BOK chief.

In its most recent forecast from May, the central bank significantly revised down its growth outlook for the country to 0.8 percent from a previous estimate of 1.5 percent.

Another factor considered in the rate freeze decision was the interest rate differential between South Korea and the U.S., which currently stands at up to 2 percentage points. A further widening of this gap could heighten volatility in the foreign exchange market.

The Federal Reserve Chair Jerome Powell has adopted a cautious approach regarding interest rate adjustments, citing the resilience of the U.S. economy and various uncertainties.

Regarding future monetary policy, the BOK chief stated that uncertainties remain 'too high,' and priorities will be established after assessing relevant data.

Rhee cautioned, 'If U.S. tariffs take effect as scheduled, while housing prices continue to rise unchecked, it could lead to a significantly worse scenario for us, compromising the balance between financial stability and growth.'

'Given the current circumstances and numerous influencing factors, predicting when or how far we might lower rates is challenging,' he added.

The BOK has been on a path of monetary easing since October, having reduced interest rates cumulatively by 100 basis points.