[SEOUL] The Bank of Korea (BOK) is poised to keep its policy settings steady while updating economic forecasts as authorities weigh risks that a frothy housing market could fuel household debt against the need to support an economy hit by US tariffs.
Some 22 of 23 economists surveyed by Bloomberg forecast the central bank will leave the benchmark interest rate at 2.5 per cent on Thursday (Aug 28), extending a pause in the easing cycle. One forecast a quarter-point cut. After lowering borrowing costs four times since October, authorities paused in July amid concerns over soaring property prices in Seoul and a rapid buildup of mortgage debt.
Governor Rhee Chang Yong has signalled that the bank remains committed to an accommodative stance, though he’s repeatedly warned of financial stability risks. The central bank will closely monitor developments in the economy and prices while staying vigilant against financial imbalances as internal and external uncertainties remain high, he told lawmakers last week.
At the July policy meeting, Rhee said that four board members were still open to a rate cut within three months, keeping the door to potential action in August ajar. At the same time, he highlighted uncertainties over the economic outlook and US trade policy, while flagging concerns that lowering borrowing costs before the US Federal Reserve makes its next move could worsen property risks.
In the US, Fed chair Jerome Powell signalled in Jackson Hole last week that the US could cut rates in September. He cited a “shifting balance of risks”, pointing to labour market strains, while warning that tariffs are stoking inflation. Markets rallied on the prospect of easing, but there’s a risk that volatility could increase if US President Donald Trump is perceived to be intervening in Fed operations.
The BOK will also release an updated growth forecast this week. The government last week projected a 0.9 per cent expansion this year, while warning that it might be tough to achieve that result. The estimate compares with the BOK’s 0.8 per cent estimate released in May.
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The BOK is also set to revise its inflation outlook. Growth in consumer prices slowed to 2.1 per cent in July from a year earlier, staying just above the bank’s 2 per cent target. The government expects price gains to stay close to the target as energy costs ease, though geopolitical tensions and volatile weather could revive price pressures. In May, the BOK projected 1.9 per cent inflation in 2025.
Seoul’s housing market remains a source of caution against rate cuts. Apartment prices in the capital have climbed for seven of the past eight weeks, even after the government capped mortgage loans in June. Household credit growth slowed in July to the weakest pace since March, but mortgage borrowing continued to rise, highlighting persistent demand.
Meantime, households remain upbeat. Consumer confidence rose in August to the highest in seven years, buoyed by a rallying stock market and signs of economic resilience.
On the currency front, Rhee said the won has seen significant swings in the mid-1,300 range against the US dollar, underscoring persistent volatility in foreign-exchange markets. While the won is almost 6 per cent higher versus the US dollar year to date, the currency has lost more than 2 per cent since Jul 1, putting it among Asia’s worst performers in the current quarter.
“Policy attention will remain focused on real estate and household debt,” said Kong Dongrak, economist at Daishin Securities. “The central bank needs more time to confirm whether recent measures will bring lasting stability, making a rate hold the most likely outcome.” BLOOMBERG
