Bank of Korea must cut interest rate

The Bank of Korea (BOK) is facing growing pressure to cut the key interest rate at its policy meeting later this month to prop up the sagging domestic economy, following the U.S. Federal Reserve’s 0.25 percent rate cut to 4-4.25 percent on Sept. 24.

After making its first reduction since last December, the Fed is widely expected to lower the rate at least two more times by year’s end, easing concerns over the weakening of the Korean won against the dollar and rising import prices.

However, BOK, which has maintained the key rate at 2.5 percent since May, appears to be reluctant to follow suit, citing the continued uptick in Seoul home prices. It said the interest rate cut will further fuel the already-hot housing market in the capital city and its adjacent municipalities. It called on the Lee Jae Myung administration to introduce more policy measures to tame soaring Seoul apartment prices before it reduces borrowing costs for businesses and individuals.

It is rather absurd to see BOK blaming rising apartment prices in Seoul for not lowering the interest rate when Asia’s fourth largest economy is set to grow by a mere 0.9 percent in 2025, much lower than its growth potential of 1.8 percent. On Tuesday, the Asian Development Bank even said it could be as low as 0.8 percent.

It seems that the central bank does not want to be blamed for fueling Seoul home price increases when millions of small businesses and self-employed individuals grapple with high interest payments amid stagnant consumer spending and other dismal economic conditions.

Meanwhile, many young people in their 20s and 30s are struggling to find jobs as companies refrain from adding new workers to their payrolls. Changes in apartment prices should not be the main consideration for BOK’s monetary policy decisions, but rather inflation and job market conditions.

Although the monetary easing will certainly add some upward pressure to the value of homes in areas where people prefer to live, the rate cut is not the fundamental driver for rising housing prices. The current rally is largely driven by a shortage of new homes in the capital area and increasing housing demand.

It has become more difficult for builders to construct new homes due to increased regulatory and administrative hurdles, on top of higher labor costs and surging building material prices.

But demand for apartments in Seoul has been increasing as more Koreans want to live in the capital area for education, jobs and other reasons. In addition, Seoul apartments have become one of the most lucrative and sought-after investment products due to a steady rise in value over the past decades.

Unfortunately, there isn’t much the central bank can do about the ongoing housing price surge in the capital city. It should leave that to the market principles of supply and demand and focus on its primary duties of stabilizing inflation and supporting the job market.

Consumer prices, a key gauge of inflation, increased 1.7 percent from a year earlier, the slowest growth since November 2024. Even though the country added 166,000 jobs in August, the manufacturing sector — often considered the backbone of the South Korean economy — shed 61,000 jobs from a year earlier, and the construction industry also lost 132,000 jobs, continuing to decline for the 16th consecutive month.

Jobs for people in their 20s fell by 195,000, and those in their 40s by 73,000.

These inflation and job market conditions certainly warrant an immediate rate cut. In addition, falling retail sales and sluggish facility investments suggest that BOK should ease its monetary policy stance.

According to Statistics Korea, retail sales — a gauge of private spending — declined 2.4 percent in August from the previous month, the steepest one-month fall since February 2024. Facility investment also fell 1.1 percent. The number of self-employed individuals unable to repay their loans on time surged to 161,198 in July, up from 51,045 in December 2020.

Delinquency rates at Korea’s major credit card companies hit an 11-year high of 2.3 percent in the first quarter.

Given all these indicators that point to a prolonged economic downturn, the central bank must lower the key interest rate as soon as possible.

The writer is finance editor at The Korea Times.