FOMC: "Accommodative Monetary Policy Raises Concerns of Asset Bubble Formation... Strengthening Real Estate Analysis"

'July 16 Financial Monetary Policy Committee Meeting'

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] At the Bank of Korea's Monetary Policy Committee meeting held on the 16th of last month, some members expressed concerns about the overvaluation of asset prices, including real estate, due to the accommodative monetary policy.

According to the minutes of the Monetary Policy Committee meeting published on the Bank of Korea's website on the 4th, at the July 16 meeting, one member stated, "The ratio of private debt to nominal gross domestic product (GDP) continues to rise, exacerbating the problem of excessive debt, and concerns about overvaluation or bubble formation in asset prices relative to economic fundamentals are increasing."

Another member said, "If asset prices are overvalued or debt increases excessively, the risk of a sudden adjustment grows."

Another member also advised, "Due to the base rate cuts, sufficient liquidity is currently supplied to the market, and the financial market has generally recovered stability. However, on the other hand, private credit, including household credit, is rapidly increasing, and the inflow of liquidity into the asset market continues to expand. Since potential factors that could undermine future financial stability are estimated to be increasing, caution is necessary."

In response, one member explained, "This year, in response to the economic contraction caused by the spread of the novel coronavirus disease (COVID-19), the Bank of Korea has expanded the degree of monetary policy easing, and recently, real estate prices have risen again in some areas. There is a need for a more comprehensive and in-depth analysis of the relationship between monetary policy, real estate prices, and household debt."

There was no disagreement among the Monetary Policy Committee members that the recent economic situation is worse than the basic scenario (annual GDP growth rate of -0.2%) presented by the Bank of Korea at the end of May. Accordingly, the seven members unanimously decided to keep the base interest rate at 0.5%, maintaining the accommodative monetary policy stance.

One member asked, "Is there a possibility that this year's growth rate might approach the International Monetary Fund (IMF)'s forecast (-2.1%) presented in June?" The Bank of Korea's responsible department replied, "Although the downside risks to the growth path have increased, the likelihood of this year's growth rate falling to the IMF's forecast is low."

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