🚨 Powell Hints at Rate Cut, But Bank of Korea Faces Dilemma
Today Korean Economic News for Beginners | 2025.08.25
0️⃣ Seoul Housing Prices vs 0% Growth Rate - Tough Choice for More Rate Cuts
📌 Fed Hints at Rate Cuts, Dollar Weakens, But BOK Must Consider Housing Market Stability First
💬 Fed Chairman Jerome Powell strongly hinted at possible rate cuts in September, weakening the dollar. This reduces pressure on the Bank of Korea for additional rate cuts, but rising Seoul apartment prices and tariff policy uncertainty remain obstacles. While rate cuts are needed to recover from 0% growth, housing prices in key Seoul areas like Gangnam are rising again, making it hard to implement loose monetary policy. The BOK is expected to watch housing markets and tariff negotiation results until October before deciding on additional cuts this year.
1️⃣ Easy Explanation
The US saying they will lower interest rates makes it easier for Korea to lower rates too. But the problem is that house prices are going up again.
Let me explain why US interest rates matter to Korea. When US rates are much higher than Korea's, investors prefer dollars more, and the Korean won gets weaker. When the won weakens, import prices go up and inflation worries increase, so the Bank of Korea couldn't lower rates easily.
But Fed Chairman Powell said "we might cut rates in September," which made the dollar somewhat weaker. This reduces the risk of a sharp won drop, giving the Bank of Korea the option to lower rates to boost the economy.
Looking at Korea's economy, rate cuts are actually needed. Second quarter economic growth was only 0.1%, and both consumption and investment are weak. Especially with construction and manufacturing struggling and unemployment rising, economic stimulus is desperately needed.
But there's one big obstacle: Seoul house prices. Even though the government strengthened lending regulations, apartment prices in key Seoul areas like Gangnam, Seocho, and Songpa started rising again. If rates are cut now, lending could become easier and house prices might jump.
The Bank of Korea faces a dilemma. They need to revive the economy but also control house prices. So rather than cutting rates in September, they'll likely wait until October to see more of the situation.
Trump's tariff policies are also a variable. If high tariffs are imposed on semiconductors or cars, it could seriously hurt our economy, so some say we should wait until this uncertainty is resolved.
In the end, while the US lowering rates creates better conditions, the Bank of Korea must still be careful because of house prices.
2️⃣ Economic Terms
📕 Base Interest Rate
The base interest rate is the rate the Bank of Korea charges commercial banks when lending money, and it's the standard for all loan and deposit rates.
- When the base rate goes up, loan rates also go up, and when it goes down, loan rates also go down.
- Korea's current base rate is 3.50%, which is lower than the US rate of 5.25-5.50%.
- It's the most important policy tool central banks use to control the economy.
📕 Dollar Index
The dollar index compares the dollar's value against six major currencies (euro, yen, pound, Canadian dollar, Swedish krona, Swiss franc).
- When the index goes up, it means dollar strength; when it goes down, dollar weakness.
- When the dollar strengthens, the won's value relatively falls and exchange rates rise.
- After Powell's recent comments, the dollar index fell, positively affecting the won.
📕 Monetary Policy Dilemma
A monetary policy dilemma is when it's hard to achieve multiple economic goals with one policy.
- Lowering rates to boost the economy increases the risk of rising real estate prices.
- Raising rates for price stability creates recession concerns.
- Central banks must prioritize among multiple goals when making policy decisions.
📕 Rate Cut Cycle
A rate cut cycle is when a central bank gradually lowers base rates step by step to boost the economy.
- Usually done when recession concerns or deflation fears are high.
- Rather than big cuts at once, gradual adjustments of 0.25% are typical.
- When the US enters a cutting cycle, other countries often follow with easing policies.
3️⃣ How It Works and Economic Outlook
✅ How Fed Policy Changes Affect Korea
Let's look at the specific effects of US interest rate policy changes on Korea's economy and monetary policy.
First, dollar weakness is creating exchange rate stability for the won. After Powell hinted at possible rate cuts, the dollar index fell from 103 to the early 101 range. The won-dollar exchange rate also came down from the 1,350 won range to the 1,330s, reducing import price pressures. When exchange rates stabilize, the Bank of Korea can implement easing monetary policy without inflation worries. In 2019, when the Fed started cutting rates, the BOK also cut base rates twice that year.
Second, reduced capital outflow pressure is improving financial stability. When US rates were nearly 2 percentage points higher than Korea's, investors were moving money from Korea to the US. But when the US starts lowering rates, this capital outflow pressure decreases, stabilizing stock and bond markets. Actually, after Powell's comments, foreigners' selling of Korean stocks has also slowed.
Third, we can expect improved export competitiveness. Dollar weakness leads to won strength, which burdens exports, but also lowers import raw material prices, reducing companies' production costs. This is especially positive for manufacturers that import lots of energy and raw materials. Also, the US cutting rates for economic stimulus could mean increased US consumer spending power.
Fed policy changes are providing an important turning point for Korea's monetary policy operations.
✅ The Relationship Between Housing Markets and Interest Rate Policy
Let's specifically analyze how rising Seoul apartment prices affect Bank of Korea interest rate policy.
First, rising house prices in key Seoul areas are becoming a major constraint on rate cuts. In August, apartment prices in Gangnam's big three districts (Gangnam-gu, Seocho-gu, Songpa-gu) started rising again. Especially reconstruction complexes saw bigger price increases, spreading upward signals throughout Seoul's apartment market. Cutting rates in this situation could surge loan demand and further fuel house price rises. The BOK faces big pressure because Seoul house prices jumped nearly 50% during the 2020-2021 low-rate policy period.
Second, coordination between government housing policy and monetary policy is needed now. The government tries to suppress demand through DSR (Debt Service Ratio) regulations and loan limit reductions, but rate cuts could offset these regulatory effects. So the BOK must confirm whether government housing policies are working before deciding rate policy. Whether the upward trend calms down in August real estate statistics announced in September will be an important judgment criterion.
Third, regional housing market gaps make policy decisions even more complex. While Seoul house prices are rising, rural areas remain stagnant. Especially rural small cities need rate cuts due to population decline and economic recession that sharply reduced real estate transactions. But because base rates apply nationwide, policy must be decided based on Seoul standards, risking increased regional imbalance. This also shows monetary policy limitations.
Without housing market stability, it's hard to implement aggressive rate easing policy - this is the Bank of Korea's realistic concern.
✅ Policy Priorities in Low Growth
Let's comprehensively forecast the reality of 0% growth rates and future monetary policy directions.
First, the need for economic stimulus is more urgent than ever. Second quarter GDP growth of 0.1% is essentially near-zero growth, the lowest since the 1998 financial crisis. Domestic demand weakness is especially serious, with both consumer sentiment and business sentiment indices well below baseline. Construction employment fell for four straight months, and manufacturing utilization rates remain in the early 70% range, requiring rate cuts for economic stimulus.
Second, global economic slowdown and tariff uncertainty are additional risk factors. China's structural slowdown and the Trump administration's tariff policies heavily burden Korea's export-centered economy. Especially with semiconductor and auto exports hit, this year's export growth is expected to stay in the 1% range. This deteriorating external environment makes growth recovery through domestic demand more difficult, requiring more aggressive monetary easing.
Third, additional rate cuts this year are inevitable, but timing and size matter. Most economic research institutions forecast the Bank of Korea will cut base rates by 0.25 percentage points in October or November. However, the timing could change based on housing market trends, and if house price increases continue, it might be delayed to December. Importantly, rate cuts alone can't fundamentally recover growth rates - government fiscal policy and structural reforms must happen together for real effects.
Ultimately, the Bank of Korea faces the difficult task of finding balance between short-term real estate risks and medium-to-long-term growth recovery.
4️⃣ In Conclusion
Fed Chairman Powell's rate cut hints gave the Bank of Korea policy breathing room, but also brought more complex dilemmas. The need for economic stimulus is greater than ever, but we can't ignore the task of housing market stability.
The positive factors from US policy changes are clear. Dollar weakness stabilized exchange rates and reduced capital outflow pressure, giving the Bank of Korea more space for independent monetary policy. Considering the dismal 0.1% growth rate, rate cuts are closer to necessity than choice.
But the obstacle of rising Seoul house prices remains big. Given the experience of early 2020s low-rate policies leading to house price explosions, the Bank of Korea must be careful. Especially the upward signals starting to appear centered on Gangnam's big three districts are putting big pressure on policymakers.
Ultimately, the Bank of Korea's choice will likely depend on 'timing control.' Rather than September, they'll likely cut rates in October or November after confirming some housing market stability. However, if economic indicators worsen further by then, they might cut early despite real estate risks.
The important thing is that monetary policy alone has limits. For fundamental growth recovery, government fiscal spending expansion, deregulation, and investment activation policies must happen together. Also, housing policy should shift from demand suppression to supply expansion to reduce conflicts with rate policy.
In conclusion, the Bank of Korea is expected to maintain 'gradual and careful' easing policy for now, finding optimal timing by comprehensively considering housing and economic conditions. The key will be finding a balance that doesn't miss opportunities from US rate cuts while not creating another asset bubble.
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