BOK holds key rate steady amid concerns over surging household debt, US tariffs

Seoul, July 10 (IANS) South Korea's central bank kept its benchmark interest rate unchanged on Thursday, taking a cautious approach amid concerns about rapidly rising housing prices, growing household debt and uncertainties stemming from the United States' tariff policy.

In a widely expected decision, the Monetary Policy Board of the Bank of Korea (BOK) held its key rate steady at 2.5 percent during a rate-setting meeting in Seoul, reports Yonhap news agency.

The move followed a rate cut in May, when the BOK lowered the policy rate by 25 basis points to support economic growth amid sluggish domestic demand and uncertainty stemming from the United States' sweeping tariff measures.

"Household debt has reached a critical level that significantly constrains consumption and growth," BOK Gov. Rhee Chang-yong told a press conference. "Cooling expectations for a rate cut is a key policy priority to prevent a rapid increase in housing prices in the greater Seoul area and to better manage household debt."

The on-hold decision was unanimous, while four out of six board members voiced the need to keep open the possibility of further rate reductions in the next three months, Rhee added.

Thursday's decision underscores the BOK's focus on maintaining financial stability, despite ongoing pressure to support economic growth.

Housing prices in Seoul and parts of the greater capital area have surged, fueled by easing financial conditions and expectations of further price increases under the new liberal government.

Household loans extended by South Korean banks rose by 6.2 trillion won ($4.51 billion) in June from the previous month, marking the largest monthly gain since August 2024. The BOK expects the upward trend to continue in the coming months.

In response, the government implemented stricter mortgage regulations late last month, capping mortgage loans for home purchases in the capital region at 600 million won and suspending home-backed loans for multi-homeowners.

President Lee Jae Myung has signaled the possibility of additional measures, including plans to boost housing supply and further regulate the market to curb speculation.

"Our future economic growth path could change significantly depending on the outcome of the tariff negotiations with the U.S.," Rhee said.

"Our economy will be affected not only by the tariff rate imposed on us, but also by tariffs on other countries, such as China, Vietnam, Mexico and Canada, where our companies operate major manufacturing hubs," he added.

U.S. President Donald Trump pledged to impose 25 percent reciprocal tariffs on South Korea starting Aug. 1, emphasizing that no further deadline extensions will be granted. The Seoul government has gone all out in negotiations with the U.S. to avert the tariffs.

The on-hold decision will give the central bank time to assess the impact of the government's supplementary budget.

Last week, the National Assembly passed an extra budget of 31.8 trillion won aimed at stimulating the economy and supporting the people's livelihoods. The latest package follows a 13.8 trillion-won stimulus approved in May.

The second supplementary budget is expected to boost GDP growth by 0.1 percentage point, according to the BOK chief.

In its latest forecast released in May, the central bank sharply lowered its outlook for the country's economic growth this year to 0.8 percent from its previous forecast of 1.5 percent.

Also under consideration in the rate freeze decision was the interest rate gap between South Korea and the U.S., which currently stands at up to 2 percentage points. A further widening of the gap could increase volatility in the foreign exchange market.

Federal Reserve Chair Jerome Powell has taken a cautious stance on adjusting interest rates, citing the resilience of the U.S. economy and various uncertainties.

As for the future monetary policy path, uncertainties remain "too high," and priorities will be set after assessing relevant data, the BOK chief said.

"If U.S. tariffs go into effect as planned, while housing prices remain unchecked, which will be the worst-case scenario for us, the trade-off between financial stability and growth could deteriorate significantly," Rhee warned.

"Given the current situation and multiple factors at play, it is difficult to say in advance when or how far we might lower rates," he noted.

The BOK began the current monetary easing cycle in October and has since cut interest rates by a cumulative 100 basis points.

—IANS

na/