Real Estate Overheating Burden Prevented Price Drops, Weak Real Economy Stopped Increases

Bank of Korea Holds Base Interest Rate Steady at 0.50%

Surging Asset Prices Amid Excess Liquidity

May Money Supply at 3,053.9 Trillion KRW... Increased by 35.4 Trillion KRW in One Month, Largest Monthly Increase

Released Funds Flow into Real Estate and Stock Market... "Making Additional Liquidity Supply Difficult"

Exports Still Negative Compared to Last Year

Employment Declines Continue for Four Consecutive Months

Economic Impact of COVID-19 Persists, Judged Too Early to Withdraw Liquidity

Without a Second Major COVID-19 Wave or Rapid Economic Rebound

Interest Rate Adjustments This Year Seem Difficult

[Asia Economy Reporters Kim Eun-byeol, Jang Se-hee] "Money has been loosened as much as possible, but only real estate and stocks are rising while the real economy is not recovering..."

The Bank of Korea's Monetary Policy Committee's decision on the 16th to keep the base interest rate at a record low reflects such concerns. The economic damage from the COVID-19 pandemic remains significant, making it premature to withdraw the liquidity that was injected, yet lowering interest rates further is burdensome due to soaring asset prices. South Korea also had to be mindful of the effective lower bound, the minimum limit for interest rates.

Assets Soared Due to Low Interest Rates... "Not Yet Time to Withdraw Money"

The Bank of Korea's Monetary Policy Committee cut interest rates sharply twice in the first half of this year. In March, amid financial market turmoil, it executed a 'big cut' in the base rate (from 1.25% to 0.75%), and in May, it lowered it by another 0.25 percentage points.

Following the rate cuts, the amount of money supplied to the market surged. In May, the broad money supply (M2, seasonally adjusted average balance) reached 3,053.9 trillion KRW, increasing by 35.4 trillion KRW (1.2%) in just one month. This is the largest monthly increase since related statistics began in 1986. M2 includes cash, demand deposits, money market funds (MMFs), and other short-term financial products that can be quickly converted into cash, serving as a broad monetary indicator. When households and companies take out loans, the cash deposited into their accounts is counted as M2. Considering the sharp rise in household loans in June as well, the money supply is expected to increase further. Due to excess liquidity, the 'real money gap rate' reached the 8% range in the first quarter, meaning the money supply in circulation was more than 8% above the appropriate level.

The asset market is rising based on this abundant liquidity. While low interest rates are not the sole cause, there is a strong correlation. The nationwide housing price composite index compiled by KB LiveOn was 102.4 last month, up 2.2% from 100.2 at the end of last year. The stock market has also recovered to pre-COVID-19 levels, with investor deposits (excluding on-exchange derivatives deposits) reaching a record high of 50.5095 trillion KRW on the 26th of last month.

Professor Sung Tae-yoon of Yonsei University's Department of Economics said, "The central bank does not base its policy solely on real estate, but it is true that housing prices in some parts of Seoul have surged, making it difficult to supply additional liquidity." He added, "If interest rates are lowered further, funds flowing through corporations despite government loan regulations could be channeled into real estate."

However, Monetary Policy Committee members judge that it is not yet time to withdraw liquidity. According to the Ministry of Economy and Finance and Statistics Korea, employment in June this year decreased by 352,000 compared to the same month last year, marking a decline for four consecutive months. Exports are showing signs of recovery but remain negative compared to the previous year. The consumer price inflation rate in June was 0%, far below the 2% inflation target.

On the 16th, a Monetary Policy Committee meeting was held at the Bank of Korea in Jung-gu, Seoul, chaired by Lee Ju-yeol, Governor of the Bank of Korea. On this day, the Bank of Korea decided to keep the base interest rate unchanged at 0.50% during the Monetary Policy Committee meeting.

Low Possibility of Additional Rate Cuts This Year... US Situation a Variable

Experts expect the Bank of Korea to keep interest rates unchanged until the end of this year. Unless there is a dramatic event such as a second major COVID-19 wave or a V-shaped economic rebound, adjusting rates will be difficult. Hana Bank Financial Investment Researcher Lee Sae-min said, "The corporate bond and commercial paper (CP) markets have stabilized, and the real economy's recovery requires a long time," adding, "Even if additional rate cuts are made, it will be difficult to achieve effects, so lowering rates further will be challenging." However, the situation in the United States could be a variable. If COVID-19 cases surge in the US and the Federal Reserve introduces yield curve control (YCC) or negative interest rates in response, the Bank of Korea might have room to act. Hyundai Motor Securities researcher Oh Chang-seop also said, "There is a consensus that the Bank of Korea will keep rates unchanged until the end of the year."

What to Do with Excess Liquidity

The challenge is to guide the large sums of money without a clear destination toward productivity-enhancing uses. The velocity of money calculated by nominal GDP fell to 0.65 in March, the lowest since the Bank of Korea began compiling money supply data in December 2001. The velocity of money measures how many times a unit of currency is used in transactions over a certain period, and this decline indicates that economic vitality is low and money is not flowing into consumption or investment.

Professor Lee In-ho of Seoul National University's Department of Economics pointed out, "The problem is that even if interest rates are lowered, the economy does not move at all," adding, "The Monetary Policy Committee is adjusting rates, but it is essentially ineffective, and the money raised at lower rates is not leading to (productive) investment."

This content was produced with the assistance of AI translation services.