5th Consecutive Time
The Monetary Policy Committee (MPC) of the Bank of Korea (BOK) has decided to maintain the benchmark interest rate at 3.50 percent annually. This marks the fifth consecutive freeze following similar decisions in February, April, May, and July.
The MPC held a monetary policy direction meeting on the morning of Aug. 24 and decided to maintain the current benchmark interest rate at 3.50 percent. The benchmark interest rate had been raised continuously for about a year and a half from April of last year to January of this year, and has been maintained at a steady level since. However, the final interest rate stands at 3.75 percent, leaving the possibility of further increases open.
Following the monetary policy direction meeting, Rhee Chang-yong, governor of the Bank of Korea, met with reporters and said, “It is appropriate to maintain a tight monetary policy stance for a considerable period and assess the need for additional increases. Currently, it is premature to discuss interest rate cuts, as we are in the process of considering the possibility of interest rate hikes.”
The BOK’s decision to maintain a tight monetary policy is significantly influenced by the issue of increasing household debt. As of the end of June, the outstanding household credit balance amounted to 1,862.8 trillion won (US$1.4071 trillion), marking a notable increase of 9.5 trillion won compared to the previous quarter. This represents the largest quarterly increase since the fourth quarter of 2021 when it surged by 17.4 trillion won.
Among household loans, in particular, mortgage loans secured by homes reached a historic high of 1,031.2 trillion won, showing a significant increase of 14.1 trillion won compared to the previous quarter.
The perception that interest rates have already risen enough has played a role as the government relaxed various regulations last year to prevent a hard landing of the real estate market. As areas across the country have seen housing prices stop their decline and start to rise again, the expectation that housing prices have hit bottom and will once again increase has also influenced the growth of household debt.
While Governor Rhee emphasized caution against engaging in real estate investments with the expectation of interest rates dropping to the 1 to 2 percent range as in the past, the market believes that interest rate uncertainty will be alleviated more than before with the benchmark interest rate being held steady five consecutive times.
Yoon Ji-hae, head of the Real Estate R114 Research Team, said, “A benchmark of 3.50 percent has become reasonable. It is a time to build fundamental strength at the current interest rate level. Last year, decision-making in the real estate market was postponed due to a rapid increase in interest rates. However, this year, the upper limit is somewhat confirmed, so it won’t be a hindrance to decision-making.”
“In the market, there is consideration for one more interest rate hike. If one more hike is implemented, then it will be considered that interest rate hikes are now over. Deciding to buy a home based on interest rate levels has now become meaningless,” she added. As a result, the perception of “borrowing to buy a house” is expected to further spread in the near term.