🚨 Bank of Korea Keeps Interest Rate at 2.5%
Today Korean Economic News for Beginners | 2025.08.29
0️⃣ Housing Prices More Scary Than Interest Rates, Two More Cuts Expected in First Half of Next Year
📌 Economic Growth vs Real Estate Overheating: Bank of Korea's Difficult Choice
💬 The Bank of Korea kept the base interest rate at 2.5% but showed a careful attitude due to worries about rising real estate prices. Governor Lee Chang-yong said, "In the current situation, cutting interest rates would likely stimulate the real estate market more than boost the economy." However, with continued slow growth, analysts say two rate cuts are still possible in the first half of next year. The Monetary Policy Committee is expected to watch the government's real estate supply measures next month before deciding future policy direction.
1️⃣ Easy to Understand
The Bank of Korea is having trouble cutting interest rates easily. The economy is weak, but housing prices keep rising, so cutting rates might increase housing prices more than help economic recovery.
Let me first explain what the base interest rate is. The base interest rate is the main rate set by the Bank of Korea. It becomes the standard for banks when they lend and borrow money. When the base rate goes down, both loan interest and savings interest become lower, making it easier for people to borrow money and spend more.
Usually, when the economy is bad, central banks cut interest rates to revive the economy. When borrowing becomes easier, companies invest more and individuals spend more, which makes the economy more active. On the other hand, when the economy gets too hot or prices rise too much, they raise rates to cool down the economy.
But Korea's current situation is a bit complicated. The economy seems weak enough to need rate cuts, but the real estate market is still very hot. Especially in Seoul and the greater Seoul area, apartment prices keep rising. If rates are cut, more people will try to get loans to buy houses.
Bank of Korea Governor Lee Chang-yong worried that "cutting rates now would cause more real estate price increases than economic stimulus effects." This means that even if rates are cut, instead of companies investing more or consumption becoming more active, most of that money would likely flow into real estate.
But economic recovery is also an important issue. Korea's economic growth rate is lower than expected, and exports are also struggling. We can't keep interest rates high forever. That's why experts think rates might be cut 1-2 times by 0.25 percentage points each in the first half of next year.
The government also plans to announce measures to increase housing supply next month. If policies that stabilize housing prices come out, the Bank of Korea can cut rates with more confidence.
In the end, the Bank of Korea is in a difficult situation where it must catch both rabbits: economic stimulus and real estate stability.
2️⃣ Economic Terms
📕 Base Interest Rate
The base interest rate is the main rate set by the Bank of Korea, which becomes the standard for all market interest rates.
- When the base rate goes up, both loan interest and deposit interest rise together.
- It's lowered to activate the economy when times are bad, and raised to calm the economy when prices rise.
- Currently at 2.5%, gradually raised after COVID-19.
📕 Financial Stability
Financial stability means the financial system works normally even during external shocks.
- Financial stability is threatened when household debt increases rapidly or real estate bubbles form.
- The Bank of Korea considers financial stability as an important mission along with price stability.
- Both economic conditions and financial stability are considered when deciding interest rate policy.
📕 Potential Growth Rate
Potential growth rate is the maximum economic growth rate a country can achieve without inflation.
- Korea's potential growth rate is estimated to be around 2%.
- When actual growth rate is below potential growth rate, economic stimulus is needed.
- The potential growth rate itself is declining due to population decrease and productivity slowdown, which is worrying.
📕 Monetary Policy
Monetary policy is how central banks manage the economy by controlling interest rates and money supply.
- Adjusting the base interest rate is the most important monetary policy tool.
- Accommodative monetary policy (rate cuts) is used during economic recession.
- Restrictive monetary policy (rate hikes) is used when there are inflation concerns.
3️⃣ Principles and Economic Outlook
✅ Complex Relationship Between Interest Rates and Real Estate Market
Let's analyze how interest rate policy affects the real estate market and the special nature of the current situation.
First, low interest rates greatly increase demand for real estate investment. When rates fall, loan interest burden decreases, giving more people the ability to buy houses. Also, as deposit interest becomes lower, real estate investment looks relatively more attractive. A typical example was when rates were lowered to 0.5% in response to COVID-19 in 2020-2021, causing Seoul apartment prices to soar. At that time, the average price per 3.3㎡ rose more than 50% in just two years, becoming a social problem.
Second, the current real estate market has complex factors including supply shortage and future value expectations. In Seoul and the greater Seoul area, apartment prices in areas with good locations like school districts or transportation hubs continue to rise while new supply is limited due to reconstruction and redevelopment regulations. Especially, couples in their 30s-40s and families considering children's education haven't given up on 'owning their own home,' so even a small rate cut could revive their buying psychology.
Third, concerns about increasing household debt also make rate cuts difficult. Current household debt exceeds 1,900 trillion won, reaching 105% of GDP. While rate cuts would reduce interest burden for existing borrowers, new loan demand could surge, potentially increasing overall household debt. Especially for real estate mortgage loans, since loan amounts are large and repayment periods are long, the impact of interest rate changes is very significant.
As the channels of interest rate policy effects have changed from the past, it's difficult to expect traditional monetary policy effects.
✅ Economic Stimulus Effect vs Asset Price Rise Effect
Let's analyze how rate cuts would actually work in the current situation.
First, due to weak corporate investment, rate cuts' economic stimulus effect may be limited. Manufacturing companies are cautious about new investments due to intensified competition with China and global supply chain reorganization. Even if rates become lower, if market prospects are unclear, companies may not actively increase facility investment. In fact, recent manufacturing facility investment growth rates have been negative, making it difficult to revive investment sentiment with rate cuts alone.
Second, consumption stimulus effects are also expected to be smaller than before. After COVID-19, consumption patterns changed, and rate cuts don't directly lead to increased consumption as much. Especially young generations are in 'saving mode' due to anxiety about the future, so even if rates fall, they tend to prefer saving rather than immediately increasing consumption. Also, the aging population increasing the proportion of elderly people with low consumption tendencies is another factor limiting consumption stimulus effects.
Third, relatively, money flow into asset markets like real estate and stocks is expected to appear quickly. High-income groups and institutional investors with investment capacity tend to increase real estate or stock investments as soon as rate cut signals appear. Especially apartments in preferred areas like Seoul's Gangnam district, Bundang, and Pyeongchon could see increased trading volume and prices just from rate cut expectations. This becomes a factor that increases the 'asset bubble' risk that policy authorities worry about.
In the end, in the current economic structure, the side effects of rate cuts seem likely to be greater than positive effects.
✅ Future Interest Rate Policy Scenarios and Outlook
Let's predict future interest rate policy direction considering various factors.
First, the government's real estate supply measures will be a key variable for interest rate policy. If the government's real estate policy scheduled for announcement next month can substantially contribute to supply expansion, the Bank of Korea can also consider rate cuts with less concern about real estate side effects. For example, if it includes expanding supply volume for 3rd new towns, easing reconstruction and redevelopment regulations, and expanding metropolitan transportation in the greater Seoul area, it would help stabilize the real estate market in the medium to long term. On the other hand, if ineffective measures come out, rate cut timing could be delayed further.
Second, changes in external economic conditions are also important considerations. US interest rate policy, China's economic recovery level, and European economic conditions greatly affect Korea's exports and growth. Especially if the US cuts rates further or China's economy recovers faster than expected, Korea would also have stronger justification for rate cuts to stimulate the economy. Conversely, if global economic slowdown intensifies, export weakness could become prolonged, potentially requiring more aggressive monetary easing.
Third, market experts highly expect the possibility of two rate cuts in the first half of 2025. The dominant forecast is that the current base rate of 2.5% will fall to 2.0%. However, the timing and extent of cuts are expected to depend on real estate market stability. If real estate supply measures show effects and housing price increases slow down, rate cuts could be possible even within this year, but if the real estate market continues to overheat, it could be postponed to the second half of next year.
In the end, the success of interest rate policy depends on policy coordination with real estate market management.
4️⃣ In Conclusion
The Bank of Korea's decision to freeze the base interest rate well shows the complex situation Korea's economy currently faces. Even in a situation where economic stimulus is needed, it's caught in a dilemma where traditional monetary policy tools can't be easily used due to concerns about real estate market overheating.
The biggest problem is that the side effects of rate cuts could be greater than positive effects. In the past, when rates were cut, corporate investment and household consumption increased, reviving the economy, but now most of that money would likely flow into real estate. This could fuel housing price increases, making homeownership even more difficult for ordinary people.
But prolonged economic recession is also a problem. Korea's economic growth rate is below the potential growth rate, and export weakness and domestic demand stagnation continue, so we can't keep interest rates high indefinitely. Especially with high youth unemployment rates and serious funding difficulties for small and medium enterprises, appropriate monetary easing is necessary.
In this situation, the government's real estate policy plays a very important role. If substantial supply expansion measures come out and the real estate market stabilizes, the Bank of Korea can also pursue rate cuts with confidence. Conversely, if real estate measures lack effectiveness, interest rate policy will continue to be constrained.
For young professionals or those preparing for homeownership, it's important to understand this policy environment well. Rather than rashly taking out loans to buy houses just because rates fall, careful decisions should be made considering one's income level and future plans comprehensively.
It's also necessary to look at not only interest rate changes but also government real estate policies, supply plans, and regional development plans together. In the long term, more stable investment opportunities can be found in areas where supply increases or transportation infrastructure improves.
In the end, the current situation requires patience and wisdom from both policy authorities and market participants. Pursuing long-term stability rather than short-term gains will help both individuals and society as a whole.
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