Bank of Korea holds for now, lays ground for rate cut after Fed

[SEOUL] The Bank of Korea (BOK) paved the way for a possible interest rate cut after an expected move by the Federal Reserve next month, while taking advantage of a modest uptick in the economy to hold borrowing costs steady for now. 

The central bank kept its seven-day repurchase rate at 2.5 per cent on Thursday (Aug 28), a decision that aligned with the expectations of 22 of 23 economists surveyed by Bloomberg. 

The BOK said in a statement that it maintains its rate cut stance, but would hold rates for the time being as it monitors household debt risks and the impact of US tariffs.

Still, another rate cut appears to be on the cards. Five out of six board members are open to lowering the rate in the next three months, BOK governor Rhee Chang-yong said at a briefing after the decision. He said one member had even favoured lowering the rate at Thursday’s meeting. 

Rhee cautioned that a further rate cut was not guaranteed, as the central bank can only reduce borrowing costs further if financial stability is not compromised.

“While stimulus is indeed necessary, the key question is how quickly growth would respond if rates were cut further,” Rhee said. “At this stage, the risks are that an additional rapid rate cut could trigger stronger side effects, such as higher housing prices and greater household debt, outweighing the positive impact on growth.”

The South Korean won maintained its advance after the BOK’s decision, up about 0.5 per cent for the day to around 1,387.45 per US dollar. The won got a brief additional boost when Rhee suggested that the US probably saw the BOK’s efforts to support the currency as moves pushing it in a direction desired by Washington. 

The overall takeaway from the statement and Rhee’s comments point to the likelihood of a near-term rate cut, once the central bank has more confidence that household debt will not mushroom on frothy property prices. Waiting for now also gives authorities time for the Fed to cut rates in September, an expected move that would help firm up the won ahead of any BOK action.

“The board appears inclined to wait for further stabilisation in household debt and real estate prices, but once the housing-supply measures come out in September, it’ll likely see little reason to delay further, so I expect a rate cut in October,” said Park Jeong-woo, a Nomura Holdings economist.

Seoul’s housing market remains a key constraint on rate cuts. Apartment prices in the capital have continued to climb, albeit at a slower pace, even after the government capped mortgage loans in June. Household debt expanded in the second quarter at the quickest pace since 2021, fuelled by a jump in mortgage lending, underscoring persistent demand. 

In its latest effort to prevent the housing market from overheating, the government is planning on unveiling a new measure to boost the supply of housing. Kim Yong-beom, a senior presidential secretary, said last week that honing of the measure is in its final stages.

“In Seoul and its surrounding areas, housing price increases and transaction volumes have decelerated, but the expectations for rising housing prices remain high,” the BOK said. It added that government steps already implemented had “significantly” weakened growth in household loans.

“I don’t think the governor was trying to say that financial stability is now the overriding priority going forward,” said Park Chong-hoon, a Korea economist at Standard Chartered. “I still think the market is right to price in a rate cut in October and, while not this year, if the output gap persists, there’s room for another cut early next year.”

Alongside the rate decision, the BOK released updated forecasts, nudging up its growth outlook for this year to 0.9 per cent from 0.8 per cent in May, and revising its inflation projection to 2 per cent from 1.9 per cent.

Exports, helped by overseas chip demand, have held up better than expected, providing scope for the BOK to maintain its pause in easing policy, the bank indicated in its statement.

Rhee added that this week’s summit between South Korean President Lee Jae-myung and US President Donald Trump had ended on a favourable note, enabling the BOK to stick to its slightly improved outlook for growth.

Still, the impact of tariffs is likely to weigh increasingly on the export-dependent economy over the coming months. In a separate report, the central bank said it sees the duties shaving 0.45 percentage point off growth this year and another 0.6 point next year.

“The domestic economy has shown some improvement in growth, but uncertainties surrounding the future path of economic growth remain high due to US tariff policies,” the BOK said.

That suggests it is largely a matter of when the next rate cut arrives rather than if.

“Since the export environment isn’t expected to improve next year, they’ll probably argue that domestic demand needs to be supported through rate cuts to back up growth,” said StanChart’s Park. “But how effective that will be remains in question.” BLOOMBERG