🚨 BOK Freezes Base Rate
Today Korean Economic News for Beginners | 2025.10.24
0️⃣ Governor Lee: "Housing Prices Are Eating Away Growth"…Leaves Door Open for November Cut
📌 Three Consecutive Freezes Due to Real Estate and Exchange Rate Concerns, Cautious Approach Amid Economic Slowdown
💬 The Bank of Korea (BOK) froze the base rate at 3.00% for the third consecutive time. Governor Lee Chang-yong said at a press conference that "housing prices in the Seoul area are rising again and eating away at economic growth." Recent overheating in the real estate market and the sharp rise in the won-dollar exchange rate were cited as main reasons for postponing a rate cut. However, Governor Lee stated that "we haven't completely closed the door on a rate cut at the November Monetary Policy Committee meeting," indicating a cautious approach considering the economic slowdown. Markets expect that real estate stability and exchange rate volatility will be key factors in future rate policy decisions.
1️⃣ Easy Explanation
The Bank of Korea decided to keep interest rates the same. While some voices say rates should be lowered because the economy is slowing down, rising housing prices and unstable exchange rates have made it difficult to cut rates right now.
First, let me explain what the base rate is. The base rate is the interest rate the Bank of Korea uses when lending money to or taking deposits from commercial banks. When this rate goes down, banks also lower the interest rates they charge businesses and individuals for loans. This makes people borrow more money to spend and invest, which helps the economy grow.
On the other hand, when the base rate is high, loan interest becomes expensive, so people reduce their spending and investment. However, this helps control inflation and prevents asset prices like real estate from rising too quickly.
Looking at Korea's recent economic situation, growth has been slowing down, so there have been strong voices saying rates should be lowered. In fact, the Bank of Korea has already cut rates twice this year. But recently, housing prices have started rising again, especially in the Seoul metropolitan area.
Governor Lee Chang-yong used the phrase "housing price increases are eating away at economic growth" at this press conference. What does this mean? When housing prices go up, people who want to buy homes need to borrow more money, and their monthly interest and principal payments increase. This means less money to spend on other things, which weakens consumption. Also, because people expect housing prices to keep rising, they pour money into real estate rather than investing in the real economy. These phenomena ultimately block the productivity and growth of the entire economy.
Another problem is the exchange rate. Recently, the won-dollar exchange rate has surged, exceeding 1,380 won per dollar. A rising exchange rate means our currency is losing value. If we lower interest rates in this situation, foreign investors might think "Why invest in Korea when interest rates are low and the exchange rate is unstable?" and pull out their money. This could make the exchange rate rise even more and destabilize the financial market.
The Bank of Korea is in a dilemma. To revive the economy, they need to lower rates, but if they do, housing prices might rise more and the exchange rate could become more unstable. So they've decided to maintain the current rate while watching the situation.
However, Governor Lee said "we haven't completely closed the door on a rate cut at the November meeting." This means that if housing prices stabilize and exchange rate volatility decreases, they could cut rates as soon as next month. Also, if the economic slowdown becomes more serious than expected, they might have to lower rates despite real estate and exchange rate concerns.
In the end, the Bank of Korea is walking a tightrope between stimulating the economy and maintaining financial stability, and will likely make rate decisions while closely watching the real estate market and exchange rate trends.
2️⃣ Economic Terms
📕 Base Rate
The base rate is the benchmark interest rate the Bank of Korea uses when dealing with commercial banks.
- When the base rate goes down, bank loan interest rates also decrease, which increases spending and investment.
- Conversely, when the base rate rises, loan interest becomes expensive and spending and investment decrease, but this helps stabilize prices and control asset prices.
- Central banks adjust the base rate considering economic conditions, inflation, and financial stability.
📕 Potential Growth Rate
The potential growth rate is the maximum speed at which a country's economy can grow without creating inflation pressure.
- It is calculated based on the economy's supply capacity, including labor, capital, and technological advancement.
- When asset prices rise without productivity improvements, like housing price increases, the actual growth rate can fall below the potential growth rate.
- Korea's potential growth rate has been continuously declining from around 5% in the early 2000s to the low 2% range currently.
📕 Financial Stability Risk
Financial stability risk refers to factors that threaten financial market stability, such as surging real estate prices, rapid exchange rate changes, and increasing household debt.
- When these risks grow, central banks prioritize market stability over economic stimulus.
- As seen in the 2008 financial crisis or the 2022 UK pension fund crisis, financial instability can severely shock the real economy.
- Therefore, financial stability is an important consideration when deciding interest rate policy, not just inflation.
📕 Exchange Rate Volatility
Exchange rate volatility is an indicator showing how sharply exchange rates rise and fall.
- When exchange rates are stable, companies can easily plan their imports and exports, and foreign investors can invest with confidence.
- Conversely, when exchange rate volatility is high, uncertainty increases and both corporate and foreign investment shrink.
- Central banks try to manage exchange rate volatility through interest rate policy and foreign exchange market intervention.
3️⃣ Principles and Economic Outlook
✅ Why Rising Housing Prices Hurt Growth
Let's specifically analyze why rising housing prices negatively impact economic growth.
First, household spending power greatly decreases. When housing prices rise, the loan amount needed to buy a home increases, and the monthly interest and principal burden grows. For example, if the average price of Seoul apartments rises from 1 billion won to 1.2 billion won, and someone takes out an 80% loan, the loan principal increases from 800 million won to 960 million won. Assuming a 3.5% interest rate, annual interest alone increases from 28 million won to 33.6 million won, a 5.6 million won increase. This is about 470,000 won more per month, money that cannot be spent on consumption or savings. In fact, the recent slowdown in household consumption growth is not unrelated to this increased housing cost burden.
Second, resource allocation becomes distorted. When real estate prices rise quickly, people have greater incentive to invest in real estate rather than productive businesses. In fact, while startup investment and manufacturing investment have stagnated recently, real estate-related investment has increased. The problem is that real estate investment merely changes ownership of existing assets rather than creating new value. If this phenomenon continues, innovation and productivity improvement across the economy slow down, and the potential growth rate can decline in the long term.
Third, income inequality deepens and the consumption base weakens. As the wealth gap between those who own homes and those who don't widens, young people and renters feel greater relative deprivation. They reduce consumption and increase savings due to anxiety about the future. They also postpone marriage and childbirth, which in the long term leads to demographic deterioration and domestic market contraction. Japan's fall into long-term recession after the real estate bubble burst in the 1990s also involved similar mechanisms.
While rising real estate prices may seem to boost the construction economy in the short term, they are a factor that reduces the vitality of the entire economy in the long term.
✅ Exchange Rate Instability and Monetary Policy Constraints
Let's examine how central bank interest rate policy is constrained when exchange rate volatility increases.
First, concerns about foreign capital flight grow when rates are cut. In an open economy like Korea, the flow of foreign investor funds greatly affects financial market stability. If Korea's base rate falls significantly below the US rate, foreign investors judge that their interest income from investing in Korea decreases. Moreover, if the won's value is also unstable, there's exchange loss risk, giving them even more incentive to withdraw funds. In fact, when the BOK rapidly raised rates in 2022, the won-dollar exchange rate soared to the 1,400 won range and foreign bond investment funds left on a large scale.
Second, surging exchange rates lead to rising import prices, offsetting the effect of rate cuts. When exchange rates rise, prices of imported goods like raw materials, energy, and food increase. For example, if the exchange rate rises 7% from 1,300 won to 1,400 won, you must pay 7% more won to import the same amount of crude oil. This leads to higher gas station prices, and rising transportation costs create overall inflation pressure. If you try to stimulate the economy by lowering rates but prices rise instead, the real interest rate (nominal rate - inflation rate) doesn't fall as much as expected, and the policy effect is halved.
Third, it becomes a channel for transmitting global financial market volatility domestically. Recently, as the US maintains high interest rates, the strong dollar continues. In this situation, if Korea independently lowers rates significantly, the interest rate gap widens and exchange rate volatility can increase further. Japan's case in 2023 is typical - they maintained negative interest rates but the yen plummeted, eventually forcing them to raise rates. The Bank of Korea is also aware of such cases and operates interest rate policy carefully.
Exchange rate instability is an important constraint that makes it difficult for central banks to decide rates based only on the domestic economy.
✅ Future Interest Rate Policy Outlook and Scenarios
Let's review several scenarios for how the Bank of Korea's interest rate policy will unfold going forward.
First, the real estate stability + exchange rate stabilization scenario. If housing price increases in the Seoul area break and the won-dollar exchange rate stabilizes below 1,350 won over the next few weeks, a rate cut is likely at the November Monetary Policy Committee meeting. Governor Lee's comment that "we haven't completely closed the possibility" seems to consider this scenario. Especially if economic slowdown signals become clearer, they may prioritize economic stimulus over financial stability. In this case, the base rate would be cut by 0.25 percentage points to 2.75%.
Second, the real estate overheating scenario. Conversely, if housing prices rise further due to expectations of government deregulation and a low interest rate trend, the rate freeze could be prolonged. There was a similar situation in the second half of 2021, when the BOK raised rates despite economic slowdown signals, concerned about real estate overheating. Historically, central banks tend to emphasize real estate stability because they've often faced bigger crises later after letting asset price bubbles grow. In this case, the 3.00% rate would be maintained through year-end, with cuts only considered in early next year.
Third, the economic plunge scenario. If export weakness intensifies and domestic demand contracts sharply, raising recession concerns, an emergency rate cut could be implemented despite real estate and exchange rate concerns. Especially if real economy indicators deteriorate rapidly, such as soaring unemployment or increasing corporate bankruptcies, the central bank must prioritize reviving the economy over financial stability. Just as the BOK made a 0.50 percentage point emergency cut in early 2020 during COVID-19, bold measures can come in crisis situations.
Currently, the first scenario seems most likely, but data over the next few weeks will be decisive.
4️⃣ In Conclusion
The Bank of Korea's rate freeze decision clearly shows the central bank's dilemma of having to make difficult choices between stimulating the economy and maintaining financial stability. Governor Lee Chang-yong's remark that "housing prices are eating away at growth" is a strong warning that the real estate problem is damaging the entire economy's growth potential, beyond being a simple asset market issue.
Our economy currently faces a complex situation. While growth is slowing and rates should be lowered to stimulate the economy, housing prices in the Seoul area are rising again and exchange rates are unstable, making it difficult to rashly cut rates. Lowering rates could raise housing prices further and cause foreign capital to leave, but keeping them the same could make the economy worse.
An important point in this decision is that the Bank of Korea hasn't completely closed the door. Leaving open the possibility of a rate cut at the November meeting shows their willingness to quickly adjust policy depending on future real estate market and exchange rate trends. If housing prices stabilize and exchange rate volatility decreases, a rate cut could be implemented as soon as next month.
How should young workers or financial beginners accept this situation? First, they should recognize that loan interest rates are unlikely to fall significantly for a while. If you're planning to get a home purchase or jeonse loan, it's good to prepare expecting that rates won't fall quickly even if they don't rise further.
Also, deposit and savings account interest rates will likely maintain current levels for a while. Therefore, if you have spare funds, putting them in time deposits or savings accounts isn't a bad choice. However, since rates could fall in the long term, choosing medium-term products of about 1-2 years may be more advantageous than very long-term products.
From an investment perspective, remember that interest rate trends also affect the stock market. When rates are high, companies' financing costs increase, burdening their performance, but conversely, falling rates can be positive for the stock market. Therefore, you need to adjust your investment strategy while watching future interest rate policy direction.
Ultimately, the real estate market and exchange rate trends over the next few weeks will determine the Bank of Korea's next decision. It's time for both financial market participants and the general public to carefully watch these two variables.
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