BOK freezes rate at 2.5% amid surging home prices in Seoul

Bank of Korea Gov. Rhee Chang-yong speaks during a press conference at the bank headquarters, Thursday. Yonhap

Bank of Korea (BOK) left the key rate unchanged at 2.5 percent on Thursday, citing the recent sharp uptick in housing prices in Seoul metropolitan areas.

BOK Gov. Rhee Chang-yong said the second supplementary budget of 32 trillion won ($23 billion) is expected to lift Korea’s gross domestic product (GDP) by 0.1 percentage point.

“The pace of housing price increases in the Seoul metropolitan area in particular is faster than in August last year,” Rhee said during a press conference at the bank headquarters. “The unbridled real estate prices in Seoul and the surrounding region will exacerbate a host of problems, including a sense of being left behind among the younger generation. It’s not certain that this issue will be brought under control by next month.”

The central bank’s May economic forecast already factored in the first extra budget, he added.

“We had projected in May that the economy will grow 0.8 percent this year. But new data has since then suggested that consumption recovered slightly stronger than previously expected, with exports, especially semiconductors, remaining strong.”

Still, the positive spillover from those developments may be less robust, dampened by the quarters of slowdown in the construction sector.

“The builders are having it worse than expected. We will continue to review incoming data," the governor said.

The possibility of the U.S. imposing a 10 percent reciprocal tariff was the greatest headwind to the Korean economy in May, but uncertainty now has shifted to the next round of tariff measures, though that has been postponed until August 1.

“The Aug. 1 decision will help us better gauge the economic impact of both the supplementary budgets and the tariffs. We will be able to factor in those impacts when we update our growth outlook for the August monetary policy meeting,” he added.

Moody’s Analytics economist Dave Chia said the widely expected rate freeze underscores the central bank’s concern over worsening financial conditions, particularly the sharp rise in household debt and the sustained increase in housing prices.

This, together with the effects of the May rate cut, is still playing out, leading policymakers to focus on evaluating the impact from U.S. tariffs and global market volatility.

“The bank wants to avoid compounding uncertainty while ensuring that monetary policy remains responsive to evolving risks. We expect one more cut this year,” he said. “With the 90-day pause on tariff hikes in the U.S. extended to Aug. 1, Korea has received notice that it will face a 25 percent tariff on that date. This puts more pressure on the country to reach a trade agreement."

Another concern is the potential loss of tariff exemptions on semiconductor exports, Korea’s key economic driver.

“This would significantly amplify trade-related risks. Furthermore, the country’s deep integration into global supply chains leaves it vulnerable to secondary effects from U.S. tariffs on other nations and commodities," the economist said.