The Bank of Korea remains steady! Keeping the interest rate unchanged at 2.5%, rising housing prices and tariffs become the focus

According to the Zhitong Finance APP, the Bank of Korea maintained its benchmark interest rate on Thursday amid soaring housing prices and the economic threat posed by increased tariffs from the United States, continuing to observe the effects of previous easing policies. The Bank of Korea kept the 7-day repurchase rate unchanged at 2.5%, in line with the general expectations of 19 economists surveyed.

This decision reflects the Bank of Korea's desire to maintain a loose monetary policy while remaining vigilant about the financial imbalances caused by the surge in apartment prices in Seoul and the uncertainty surrounding U.S. trade policies.

The Bank of Korea has cut interest rates twice this year and also reduced rates twice in the last quarter of last year. The central bank is concerned that overly rapid easing could trigger a real estate boom similar to that seen after the pandemic, a factor that may have influenced the committee members' decision-making. According to data from the Korea Real Estate Board, apartment prices in Seoul rose by 3.5% in the first half of this year.

However, economists surveyed expect the next rate cut to occur next month, after which the central bank may pause further easing of policies.

"An August rate cut still seems possible, partly due to the need for policy coordination after fiscal expansion," said Kong Dongrak, an economist at Daishin Securities.

Following the announcement of the interest rate decision, the Korean won retraced earlier gains against the U.S. dollar, remaining largely flat. The yield on South Korea's 3-year government bonds continued to decline, falling about 2 basis points to 2.46%.

Thursday's decision indicates that members of the Bank of Korea's committee are cautious about overly rapid easing, fearing it could exacerbate household debt, and they prefer to wait for clearer trade risks related to economic and real estate market regulation policies before resuming rate cuts.

One of the most pressing challenges facing the South Korean economy is dealing with the impact of U.S. tariffs. Like other countries, South Korea has been granted more time for negotiations, as Washington's comprehensive tariffs on South Korean goods will be raised to 25% again on August 1. Specific industry tariffs on automobiles and steel remain significant obstacles to economic growth.

Economist Hyosung Kwon stated, "The Bank of Korea is cautious about further easing policies, which could exacerbate the real estate market—pushing up already high household debt, with little effect on domestic demand. Even so, we believe the easing cycle will remain intact."

South Korea still has time to reach a better tariff agreement with the United States to limit potential damage to its economy. The Bank of Korea will continue to monitor trade developments while keeping an eye on the real estate market.

In recent months, mortgage lending in South Korea has continued to accelerate, with housing loans in June recording the largest increase in nine months. Data from the Bank of Korea shows that last month's housing price expectation index rose to its highest level since October 2021, coinciding with the peak of South Korea's recent real estate boom. The index has risen for four consecutive months In response, the government has introduced new regulations to limit the maximum amount of mortgage loans for home purchases in the Seoul metropolitan area, but it remains unclear whether these measures are sufficient to curb household borrowing risks.

Kong Dongrak, an economist at Daishin Securities, stated, "Although there seems to be little disagreement on the overall direction of interest rate cuts, the market still has some concerns—despite the low probability—that the governor's heightened focus on financial stability and household debt may overshadow the easing momentum."

Governor Lee Chang-yong is scheduled to hold a press conference later on Thursday, where he is expected to discuss the future path of interest rates. He may disclose how many committee members opposed this decision and outline the committee's expectations for monetary policy over the next three months