South Korea's central bank says it may cut interest rates next month if Seoul's housing price control plan works

South Korea's central bank says it may ease monetary policy next month if government's housing price control measures work, after Seoul's housing prices surge

On September 26, 2567, Bloomberg News reported that officials at the Bank of Korea (BOK) expressed hope that the government's efforts to control housing prices would eventually bear fruit, leading to speculation that the BOK might change its policy as early as next month.

So far, a stronger-than-expected recovery in South Korea's housing market has prevented the BOK from continuing its easing cycle amid concerns that more accommodative policies could increase financial risks, with South Korea having one of the highest household debt levels among developed economies.

In August, the South Korean government rolled out measures to increase housing supply, aiming to stabilize the property market and prevent households from taking on more debt.

Bank of Korea (BOK) member Chang Yong-song said today (September 26) that he is hopeful these measures will begin to show results. However, Chang did not clarify whether these expectations came from investors or policymakers, and did not specify a timeframe for when the effects of the measures would become clearer. Chang's comments were included in the BOK's financial stability report just two weeks before the committee's next interest rate decision on October 11.

Meanwhile, South Korea's Finance Ministry said in a separate statement today that household debt growth may have slowed in September compared to August as government measures began to take effect. The ministry stated that the surge in lending in August was due to consumers rushing to borrow money before the new policies were implemented.

Chang's comments came after statements from two other BOK policymakers, who both discussed the need to prioritize policies that boost spending rather than just reducing household debt. While today's report offered a positive view of the government's efforts, it also highlighted the risks of moving too quickly.

Chang, who led the meeting, pointed out that there were still concerns about possible financial imbalances caused by soaring house prices in the Seoul area and rising private credit, the report said, adding that the central bank's Monetary Board remained concerned about house prices, particularly about signs that prices in Seoul's apartment market remained high.

Although the BOK has kept its benchmark interest rate at a soft 3.5 percent, some market interest rates have fallen this year, leading to higher home prices, especially in the capital's middle-class areas.

On Wednesday (September 25), Bank of Korea Executive Director Shin Sung-hwan told reporters that the BOK is still avoiding signaling interest rate cuts due to concerns that soaring prices could spread beyond Seoul. However, he suggested the BOK might be able to make policy changes without waiting for 100% confirmation that the real estate market is sluggish, citing weak consumer spending in the overall economy.

While the BOK report expressed concerns about housing prices in Seoul, it also stressed that the growth rate of housing prices was slowing, and pointed out that housing prices in areas outside Seoul were also falling.

However, the divergence between Seoul’s housing market and the slowdown in prices in the provinces complicates the BOK’s policy decisions, as construction is a key driver of the regional economy.

South Korean Finance Minister Choi Sang-mok stated that stimulating consumer spending is more important than reducing household debt and hoped the Bank of Korea would make a wise decision at its October meeting.

Reference: bloomberg.com

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