Household debt and the real estate market continue to weigh heavily on the Bank of Korea, making it harder for the central bank to cut its policy rate.
With the Bank of Korea’s monetary policy stance turning to neutral in April, there is speculation that the Monetary Policy Committee might call for a rate cut this week to boost the slowing economy. However, the prevailing view is that the central bank is unlikely to start cutting interest rates immediately.
The real estate market and household debts make it difficult to cut rates currently. A rise in housing prices has calmed down amid strong government measures to curb demand, but expectations of a rebound in real estate prices are spreading.
Still, many worry that a rate cut could give an unwanted signal to the property market, which is always a sensitive issue in Korea.
The central bank’s monetary policy stance had been tilted toward a rate hike since the Fed’s monetary policy normalization, but it turned to a neutral stance in the Monetary Policy Board meeting in April. The decision to freeze interest rates was unanimous though by its seven members.
“It is not strange that there is a prospect that some members of the board may argue for a rate cut as a minority opinion,” a source familiar with the meeting said to Asia Times on Wednesday.
The underlying factors – South Korea’s GDP growth of minus 0.3% the first quarter and the intensified US-China trade war – have increased uncertainties that could lead to calls for a rate cut.
According to the May consumer sentiment survey released by the Bank of Korea (BOK) on Tuesday, the consumer sentiment index stood at 97.9, down 3.7 points from April. The index surpassed the benchmark 100-mark level last month, marking the fifth straight month of gains, but fell below the 100 mark again due to negative GDP growth in the first quarter, sluggish exports and falling stock prices stemming from intensifying US-China trade disputes.
Considering current economic circumstances, major institutions have downgraded Korea’s GDP growth forecasts. The Organization for Economic Cooperation and Development (OECD) and the Korea Development Institute (KDI), a government-run think tank, downgraded their growth forecasts to 2.4% this month, down 0.2 percentage points respectively. The BOK also lowered its GDP growth forecast by 0.1 percentage point to 2.5% from its projection in January and lowered its consumer price forecast by 0.3 percentage points to 1.1%.
The government is refraining from commenting on monetary policy. However, the Ministry of Finance seems to want the Monetary Policy Committee to cut interest rates in consideration of economic conditions.
“It is not the government’s official position, but it is true that many Finance Ministry officials hope that the BOK will lower the interest rate,” another source said. “I think some members of the Monetary Policy Board may argue for a rate cut with a minority opinion.”
Some also believe that a cut in the policy rate by the central bank would likely not affect the real estate market, as the government maintains rigid liquidity and tax regulations to curb rising housing prices.
However, the source said: “It will not be easy for the BOK to cut the rate due to worries about the real estate market.”
In the consumer sentiment survey in May, the housing price outlook index rose by 6 points to 93 despite a fall in the consumer sentiment index.