July 30 2024: South Korea’s monetary policy board was split over the timing of interest rate cuts, with a majority of the seven-member board concerned that lower borrowing costs could lead to price increases in the housing market, according to July meeting minutes released on Tuesday.
The Bank of Korea stated at the meeting that it was time to prepare for a shift to interest rate cuts after keeping the benchmark interest rate steady at a 15-year high of 3.50% for the 12th consecutive meeting, as anticipated.
While the decision to maintain the rate was unanimous, the board appeared divided on when to act. Some members worried that lowering rates could further inflate Seoul’s already expensive housing market, while others emphasized the importance of ensuring a soft landing for the economy.
At least five board members expressed concerns about financial stability risks due to rising home prices.
“In summary, inflation is easing towards (the bank’s) target level but we should still be on alert for upside risks, and risks related to a reduction in interest rates are bigger now due to household debt increases and the home price increases we see now,” one board member said.
Concerns about inflation have recently been overshadowed by worries that household debt is rising quickly and consumer spending is slowing too rapidly.
Any interest rate reductions should be considered “after factoring in the medium-term inflation level in relation to our inflation target, macroeconomic policy changes as well as FX market changes,” another board member noted.
Headline inflation for June slowed to an 11-month low of 2.4%, close to the bank’s target of 2%.
South Korea’s economy unexpectedly contracted in the second quarter, marking the sharpest decline since 2022, as a drop in consumer spending undermined an export boom. This has reinforced expectations that an interest rate cut could occur in the coming months.
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