BOK freezes key rate amid surging household debt, home prices

Bank of Korea (BOK) Gov. Rhee Chang-yong bangs the gavel to open a Monetary Policy Board meeting at the central bank in Seoul, July 10. Joint Press Corps

Korea's central bank kept its benchmark interest rate unchanged Thursday to ensure financial stability amid concerns about rapid increases in housing prices and household debt.

In a widely expected decision, the Monetary Policy Board of the Bank of Korea (BOK) held its key rate steady at 2.5 percent during a rate-setting meeting in Seoul.

The move followed a rate cut in May, when the BOK lowered the policy rate by 25 basis points to support economic growth amid sluggish domestic demand and uncertainty stemming from the United States' sweeping tariff measures.

Thursday's decision underscores the BOK's focus on maintaining financial stability, despite ongoing pressure to support economic growth.

Housing prices in Seoul and parts of the greater capital area have surged, fueled by easing financial conditions and expectations of further price increases under the new liberal government.

Household loans extended by Korean banks rose by 6.2 trillion won ($4.51 billion) in June from the previous month, marking the largest monthly gain since August 2024. The BOK expects the upward trend to continue in the coming months.

In response, the government implemented stricter mortgage regulations late last month, capping mortgage loans for home purchases in the capital region at 600 million won and suspending home-backed loans for multi-homeowners.

BOK Gov. Rhee Chang-yong earlier signaled that the pace of rate cuts would be adjusted based on housing market conditions, despite the ongoing monetary easing cycle that began in October 2024.

Following the rate cut announcement in May, he warned, "Lowering the base rate too quickly could fuel asset prices, such as real estate. We must not repeat the mistakes made during the COVID-19 period."

The on-hold decision will give the central bank time to assess the impact of the government's supplementary budget, according to analysts.

Last week, the National Assembly passed an extra budget of 31.8 trillion won aimed at stimulating the economy and supporting the people's livelihoods. The latest package follows a 13.8 trillion-won stimulus approved in May.

Also under consideration for the BOK was the interest rate gap between Korea and the United States, which currently stands at up to 2 percentage points. A further widening of the gap could increase volatility in the foreign exchange market.

Federal Reserve Chair Jerome Powell has taken a cautious stance on adjusting interest rates, citing the resilience of the U.S. economy and various uncertainties.