Bank of Korea expected to extend hold on property concerns
THE Bank of Korea is widely expected to extend its policy holding pattern this week as authorities weigh the risk that signalling a pivot might spur an increase in household debt and threaten efforts to maintain financial stability.
The South Korean central bank will hold its benchmark interest rate at 3.5 per cent for a 13th time when the board convenes on Thursday (Aug 22), according to 21 of 22 economists surveyed by Bloomberg. The lone economist looking for a change predicted a quarter-basis-point cut to 3.25 per cent, a move that many others now see coming in October.
The Bank of Korea has held its policy rate steady since January last year, making the current holding pattern the longest since the bank adopted a new benchmark tool in 2008. A resurgence in household debt and a sliding currency have raised concerns about easing too soon, while an export rally led by semiconductors has persuaded authorities that the economy can withstand the current policy settings, which they consider restrictive.
The Bank of Korea will meet against a backdrop of conflicting economic signals. While inflation has generally cooled enough to soothe concerns over prices, the rise in mortgage loans has troubled officials. Consumers increasingly comfortable with borrowing costs are snapping up apartments in Seoul on expectations that a shortage of homes will deepen.
An increase in construction costs, tighter conditions for securing loans and a decline in construction starts have stirred concerns that a supply crunch looms, fuelling housing demand. Last week, apartment prices in the Seoul area saw the biggest weekly gain since September 2018.
“In light of early signs of re-leveraging in housing markets in the Seoul metropolitan area, many in the MPC will likely want to wait until tighter macroprudential measures on mortgage lending take hold,” said Goldman Sachs economists led by Goohoon Kwon.
Rising home prices in Seoul is a particular concern for board members, with one member expressing regret at last month’s meeting that the country’s economy has not sufficiently “de-leveraged” during the period of tight monetary policy.
With the bulk of the nation’s private wealth tied to real estate, home prices are a key source of worry for South Korean policymakers. The government earlier this month announced steps to boost housing supply in the greater Seoul area.
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