Bank of Korea Gov. Rhee Chang-yong bangs the gavel to open a Monetary Policy Committee meeting at the central bank in Seoul on Oct. 11, 2024. The meeting decided to cut the key rate by 25 basis points to 3.25 percent. (Image courtesy of Yonhap)
SEOUL, Oct. 11 (Korea Bizwire) — The Bank of Korea (BOK)’s first interest rate cut in 38 months highlighted the urgent need for South Korea to ease interest burdens on households and businesses to prop up sagging domestic demand despite concerns over rising home prices and household debts, experts said Friday.
The BOK lowered its benchmark interest rate by a quarter percentage point to 3.25 percent, marking the first reduction since August 2021.
The BOK delivered seven consecutive rate hikes from April 2022 to January 2023 and had kept the rate at 3.5 percent, the highest level in about 16 years.
The rate cut decision came as high borrowing costs for a long period of time have hindered private consumption and investment and negatively affected the economic recovery despite strong exports.
Citing weak domestic demand over high interest rates, the BOK in August lowered its forecast for the South Korean economic growth this year to 2.4 percent from its previous projection of 2.5 percent.
“Exports have continued to increase while the recovery in domestic demand has been slow,” the BOK said in a statement on the monetary policy decision.
“Uncertainties surrounding the growth outlook have heightened compared to August due to the delayed recovery in domestic demand. The future path of economic growth is likely to be influenced by the pace of recovery in domestic demand, economic conditions in major countries, and trends in IT exports,” it added.
Retail sales, a gauge of private spending, fell 1.3 percent on-year in August and facility investment tumbled 5.4 percent. Construction investment also dropped 9 percent on fewer new orders in the sector.
Under the circumstances, the office of President Yoon Suk Yeol unusually expressed disappointment over the BOK’s rate freeze decision in August, and the ruling People Power Party has voiced hope for a pivot.
Easing inflationary pressure freed the central bank.
Consumer prices, a key gauge of inflation, rose 1.6 percent on-year in September, the lowest level since February 2021, when consumer prices grew 1.4 percent.
It was also the sixth consecutive month that the price growth stayed below 3 percent, with the BOK’s mid-term inflation rate being set at 2 percent.
The move also came as the Federal Reserve lowered its benchmark interest rate by a half percentage point last month in an aggressive pivot aimed at bolstering the United States’ labor market.
BOK Gov. Rhee Chang-yong said following the Fed’s big cut that an environment was created where the BOK can fully focus on domestic factors when implementing monetary policy.
“While inflation is showing a clear trend of stabilization, household debt growth has begun to slow with tightened macroprudential policies by the government, and risks in the foreign exchange market have somewhat eased,” according to the BOK statement.
Customers shop at a major discount chain store in Seoul on Oct. 2, 2024. (Image courtesy of Yonhap)
The slowdown in the growth of household debts also allowed the BOK to deliver a rate cut decision, though concerns linger over how to rein in rising housing prices that risk worsening debt problems.
After August’s rate decision, Rhee pointed to rising home prices in Seoul and the surrounding regions and household debts as crucial factors for a potential policy shift away from monetary tightening.
Household loans extended by five major banks rose by 5.6 trillion won (US$4.15 billion) on-month to come to 730.97 trillion won as of end-September.
It marked the sixth straight month led by the mortgages increase, though the growth slowed down from a record on-month increase in August after lenders tightened household lending.
Surging household debt has been one of the major concerns for policymakers here as high indebtedness is feared to curb spending.
“The growth in household debts has slowed down further in October on the back of lending curbs, but the government will continue to be on high alertness as we still see a high increase rate and the recent slowdown could be at least in part caused by seasonal factors, such as the Chuseok holiday,” an official of the financial authorities said.
The BOK said in a recent report that a rate cut by 25 basis points is projected to raise the national average home price by 0.43 percentage point in a year, and the figure will come to 0.83 percentage point for Seoul.
(Yonhap)
