Bank of Korea Holds Base Rate at 2.50 Percent Amid Growing Household Debt and Housing Market Concerns

The Bank of Korea has decided to keep its base interest rate steady at 2.50 percent, as the country grapples with soaring household debt and sustained housing market instability.

On July 10, the Monetary Policy Board of the Bank of Korea announced its decision to hold the key rate at 2.50 percent. The central bank cited heightened financial stability risks stemming from a surge in household loans and a persistent rise in property prices as major concerns.

The board emphasized the importance of thoroughly assessing the ongoing effects of household debt accumulation and rising housing prices before determining the timing and speed of any future rate cuts.

Despite forecasts of lackluster domestic economic growth, the Financial Services Commission projected stable inflation trends for the foreseeable future. While the inflation rate is expected to hover around 2 percent, contingent on stable international oil prices and foreign exchange rates, global economic uncertainties and evolving trade conditions remain as significant variables.

In June, household loans jumped by 6.2 trillion won compared to the previous month—the largest increase in ten months. Mortgage lending, in particular, surged by 5.1 trillion won, marking the biggest gain since September 2024. This phenomenon is attributed to increased expectations for higher property prices and a spike in housing transactions, particularly in Seoul.

However, regulatory measures—such as the government’s strong lending curbs and recently tightened debt service ratio (DSR) regulations—are yet to fully demonstrate their intended effects.

Addressing reporters, Governor Chang Yong Lee explained the rationale behind maintaining the current rate, stating, “If we lower interest rates excessively, the biggest risk would be a further increase in real estate prices in the metropolitan area, rather than genuine economic recovery.” He underscored the risk of social issues, especially for younger generations, should property prices in the capital region continue to soar, adding that managing household debt remains a key policy priority.

Regarding the prospects for an interest rate cut, Governor Lee revealed, “Among the six Monetary Policy Board members, excluding myself, four are open to the possibility of lowering rates, while the other two believe that maintaining the current level is more likely.”

He also noted, “We need to carefully examine upcoming tariff negotiations with the United States and the effectiveness of the government’s real estate lending management policies before making further rate decisions.”

Emphasizing the significance of financial stability and macroprudential policies, Governor Lee stated, “The Bank of Korea needs a governance structure that allows for a stronger implementation of macroprudential measures.” He called for enhanced authority for joint inspections and investigations into non-bank financial institutions as part of broader efforts to strengthen financial stability.

Lee also raised concerns about the introduction of a Korean won-based stablecoin, citing potential conflicts with foreign exchange liberalization policies and the need for a careful review given the potential for major shifts in commercial banks’ revenue structures.

This latest decision to hold the base rate represents a concerted attempt to balance financial stability with economic growth. The board’s unanimous vote reflects worries that further increases in property prices and household lending could widen financial market imbalances.

With its rate freeze, the Bank of Korea aims to manage household debt risks and surging property values, while retaining the flexibility to adjust rate policies in response to domestic and external economic conditions.

Should further policy intervention be necessary to rein in an overheated real estate market and ballooning household debt, the central bank has pledged to work closely with government authorities and implement stronger measures as needed.

Note “This article was translated from the original Korean version using AI assistance, and subsequently edited by a native-speaking journalist.”

Photo=Yonhap News Agency, Bank of Korea