Monetary Policy Board: "Sharp Rise in Household Loans... Extended Monitoring Needed for Trend Stabilization"

Minutes of the July Monetary Policy Board Meeting
Clear Disparity Between Asset Markets and Sluggish Real Economy
Rising Financial Imbalance Risks and Severe Distortions in Efficient Resource Allocation
Prolonged Period Needed to Assess the Effects of the June 27 Measures

The unanimous decision by the Bank of Korea's Monetary Policy Board to keep the base rate unchanged during its meeting on the 10th was commonly driven by concerns over the sharp increase in household loans.

Lee Changyong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee held on the 10th at the Bank of Korea headquarters in Jung-gu, Seoul. Photo by Joint Press Corps

According to the minutes of the Monetary Policy Board's meeting on monetary policy direction released by the Bank of Korea on the 29th, all members agreed that, considering both domestic and international financial and economic conditions, it would be appropriate to maintain the base rate at the current annual level of 2.50% until the next policy decision.

One member stated, "Despite improvements in consumer sentiment and robust exports, the recovery in domestic demand has fallen short of expectations, and this year's economic growth rate is expected to fall significantly below the potential growth rate. It is time to consider an additional rate cut." However, the member also pointed out, "The rise in housing prices and spread of expectations in certain regions, and the resulting surge in household loans, are emerging as potential risks to financial stability." Accordingly, the member suggested that it would be prudent to keep the base rate unchanged at this meeting, observe the effects of the strong loan regulation policy announced on June 27 and the supplementary budget, and then consider the timing and scale of any additional rate cuts.

Another member commented, "Although economic growth has improved slightly compared to the May policy meeting, overall performance remains sluggish. Given the stable trend in prices and the easing of concerns about the exchange rate, the need for a rate cut persists." However, the member also noted, "Since a rate cut could stimulate expectations of rising housing prices, particularly in the Seoul metropolitan area, and thereby exacerbate financial imbalances, it would be preferable to monitor the degree of easing in the housing price momentum before deciding on further rate cuts."

Yet another member observed, "There is a clear trend of asset markets such as finance and real estate moving out of sync with the sluggish real economy. The sharp rise in housing prices centered on the Seoul metropolitan area and the accompanying increase in household loans have brought the risks of financial imbalance and serious distortions in efficient resource allocation to a critical level."

The members unanimously agreed that more time is needed to assess the impact of the government's June 27 real estate loan regulations. One member emphasized, "Although the government has announced strong measures to manage household debt, considering the accommodative financial conditions, expectations of rising housing prices in the Seoul metropolitan area, pent-up demand from genuine buyers, and constraints on housing supply in the region, careful monitoring will be required for a considerable period."

Another member pointed out, "Household loans in the financial sector have continued to grow rapidly, driven by increased housing transactions in Seoul and other metropolitan areas. Given the time lag between housing transactions and loans, this trend is likely to persist for the time being." The member added, "While the recent implementation of strict government measures on household debt has somewhat cooled the overheated housing market in Seoul, it is still too early to determine whether the housing market and household debt will stabilize in a sustained manner."

Persistent uncertainty regarding U.S. tariff policy was also cited as a reason for the Board's decision to keep rates unchanged. One member said, "While domestic inflation remains stable at the target level and the economy is expected to recover gradually in the second half of the year, there is considerable uncertainty regarding the growth trajectory due to ongoing tariff negotiations with the United States." Another member noted, "In response to the United States' aggressive protectionist trade policies, countries are increasingly relying on bilateral negotiations rather than traditional multilateral forums. While some countries have reached agreements, the majority are either in a grace period or still negotiating, resulting in heightened uncertainty depending on how future negotiations unfold."