BOK head cautious over speedy rate cut

Bank of Korea (BOK) Gov. Rhee Chang-yong speaks during an event celebrating the central bank’s 75th anniversary at its headquarters in Seoul, Thursday. Courtesy of BOK

A sharp, speedy key rate cut could cause a spike in property prices in the Seoul metropolitan area, according to the head of the country's central bank, stressing that Korea should reduce dependence on monetary easing and extra budgets as a way to stimulate economic growth.

The decades of resorting to property market investment as an easy, short-term economic growth booster should no longer be tolerated, Bank of Korea (BOK) Gov. Rhee Chang-yong said Thursday.

Rhee also said the recent strength of the Korean currency relative to the dollar is a positive development. However, a delay in easing by the U.S. Federal Reserve could lead to a wider rate differential between the two countries, with volatility lingering in the foreign exchange market, influenced by tariff uncertainties surrounding key trade partners.

“The slew of factors warrants a steady, more calibrated monetary approach, despite the dimming economic outlook for this year,” Rhee said during a speech marking the central bank’s 75th anniversary. "We are in an easing cycle, but our dovish stance will be determined by the close monitoring of macroeconomic and financial data."

Annual increases of apartment prices in Seoul have climbed about 7 percent since March. Household borrowing extended by banks and other financial institutions have ticked up significantly in recent months.

Rhee’s stance comes amid criticism of the central bank “falling behind the curve in rate cuts,” in the context of a rapidly deteriorating outlook for the Korean economy, as evidenced by this year's growth outlook being revised down to 0.8 percent last month. This was a significant downward revision from the 1.5 percent made in February.

The 0.8 percent growth projection is the lowest since the COVID-19 pandemic, the global financial crisis in the late 2000s and the Asian financial crisis in the late 1990s.

Central to the bleaker growth outlook is sluggish growth in the country’s exports, stifled by the trade and tariff feud between the U.S. and China.

Equally concerning is the prolonged anemic domestic demand, dragged down significantly by the extended downturn in the construction sector.

“We recognize the gravity of the situation, warranting a prompt economic stimulus package,” Rhee said. “We cut the key rate last October, and have since been in an easing cycle with four 25-basis-point cuts. However, the scope and the level of stimulus must reflect decades of concerns for Korea’s low growth and a lack of structural reforms.”