BOK keeps tight monetary stance, holds key interest rate

BOK Governor Rhee Chang-yong bangs the gavel to open a Monetary Policy Committee meeting in Seoul, on Aug 22, 2024. [Photo by Joint Press Corps]

The Bank of Korea (BOK) announced on Thursday that it would maintain the key interest rate at 3.50 percent, continuing its tight monetary policy stance.

The decision comes as rising housing prices and increasing household loans pose risks, leading to concerns that an early rate cut could destabilize the real estate and financial markets and outweigh any potential economic recovery from reduced interest burdens. Given the historically large 2.0 percentage point interest rate gap with the United States, waiting to observe the Federal Reserve’s potential pivot in September would also help defend the won/dollar exchange rate and prevent foreign capital outflows.

During its second monetary policy meeting for the second half of 2024, the BOK’s Monetary Policy Board decided to hold the interest rate steady at 3.50 percent.

the BOK made a “big cut” in March 2020, as the Covid-19 pandemic threatened the global economy, reducing the interest rate by 0.50 percentage points (from 1.25 to 0.75 percent) and following with further cuts in May of that year. However, after nine rate freezes, the BOK began tightening in August 2021, raising the rate by 0.25 percentage points. This was followed by eight more increases of 0.25 percentage points and two larger hikes of 0.50 percentage points, totaling a 3.00 percentage point increase.

The tightening cycle has been interrupted since February 2022 and the rate has now been frozen for over 19 months, marking the longest period of consecutive rate holds in the BOK’s history.

Despite government and market pressures for a rate cut, the BOK’s decision to maintain the rate is largely attributed to ongoing instability in the real estate and financial markets. According to market data, Seoul’s housing price index rose by 0.76 percent in July 2024 compared to the previous month, the largest increase since December 2019. Despite efforts by financial authorities to curb household loans by raising lending rates, the surge in household debt has yet to be restrained. The combined balance of household loans at Korea’s five major banks totaled 719.9 trillion won ($538.2 billion) as of August 14th, 2024, up 4.18 trillion won in just two weeks.

BOK Governor Rhee Chang-yong also highlighted the uncertainty surrounding the timing of a monetary policy pivot, warning of risks from the foreign exchange market, the metropolitan real estate market, and household debt.

“While conditions for a policy shift are emerging, various threats remain, and it could take considerable time before a transition occurs,” Rhee said in July.

He also emphasized that the BOK must avoid sending the wrong signals regarding liquidity or rate cuts, which could inadvertently drive housing prices up. The Monetary Policy Board agreed that it was crucial to avoid such a mistake, according to the governor.

Meanwhile, inflation, the primary target of monetary policy, remains uncertain. Consumer price inflation rebounded from 2.4 percent in June to 2.6 percent in July 2024, and there are concerns about rising international oil prices due to Middle East tensions, as well as poor harvests caused by extreme weather.

Despite these concerns, some experts believe inflation conditions for a policy pivot have been largely met. Many expect that if the U.S. Federal Reserve begins cutting rates in September as anticipated, the BOK could potentially follow with a pivot as early as the following month.