(Bloomberg) -- The Bank of Korea may wait until after October to cut its key interest rate as housing inflation in Seoul threatens to ripple across the country, a former board member said, suggesting economists may need to keep pushing back their timelines for a policy pivot.
“Even an October cut will be difficult,” said Lee Seung-heon, former senior deputy governor at the BOK. “Home prices should now be considered as the most important factor.”
Apartment prices in Seoul have been picking up this year on expectations that borrowing costs would fall, spurring demand just as a shortage of middle-class homes looms. The BOK last month held its rate at a restrictive 3.5%, with BOK Governor Rhee Chang-yong citing housing prices as a concern. The board said it wanted to avoid reigniting the property market with signals for a cut.
After that meeting, a number of economists pushed their predictions for a rate cut to October from August. South Korea has one of the highest debt-to-gross domestic product ratios in the developed world, and Rhee has sought to reduce it since taking office in 2022.
Last month’s decision to stand pat on policy extended the holding pattern to the longest for the BOK since 2008, when it adopted a seven-day repurchase rate as its main policy tool.
Lee — who expected last November the BOK would hold for another year — said curbing housing prices can be just as important a mandate as taming consumer inflation. Most South Koreans hold an overwhelming share of their wealth in real estate, making property a key barometer of economic equality and a sensitive political topic.
Minutes of the July 11 meeting indeed showed a wave of unease among board members about a pick-up in home prices in Seoul and increases in household debt even as they acknowledged a trend of slowing consumer inflation. Apartment prices in the capital have posted 20 consecutive week-on-week rises, according to data from the Korea Real Estate Board.
“The financial stability mandate has become more important for the upcoming meetings,” Bum Ki Son, a Barclays Bank economist, said in a note. “Focus on financial stability makes an October rate cut a close call with increased risks of the BOK becoming more reactive than proactive.”
The rise in home prices that began in Seoul has the potential to ripple beyond the capital, and the BOK is likely to stay hawkish until it sees clear signs the price trend will moderate, Lee said. “A rate cut would spur speculation that more cuts will follow and that would worsen the danger,” he said.
The exchange rate is another reason the BOK won’t likely rush to reduce the rate, Lee said. He said 1,390 won per dollar is a key threshold authorities should aim to protect. The dollar was trading around 1,376 won Friday morning in Seoul.
Lee acknowledged growing anticipation of a rate cut as inflation is slowing and will likely continue to do so. Economic headwinds cited in the argument for a cut include potential credit-market volatility as debt restructuring among developers widens in the second half.
Private consumption also remains lackluster while declines in investment dragged economic growth into an unexpected quarter-on-quarter contraction in the April-to-June period. Worries about a slowing labor market in the US are casting a shadow over the outlook for South Korea’s exports.
On Thursday, the government-run Korea Development Institute trimmed its growth forecast for 2024 to 2.5% from 2.6% and said that a prolonged period of elevated rates would delay a recovery in private spending.
Some lawmakers, including Yoon Sang-hyun of the ruling party, have called on the BOK to conduct early rate cuts. Such political pressure only has the effect of uniting board members against easing, as no one wants to be seen as pandering, said Lee, who now teaches economics at Seoul’s Soongsil University after retiring from the BOK last year.
If and when the BOK begins its policy pivot, the total number of cuts in the next easing cycle is likely to amount to as few as three, with the moves staggered over an extended period, Lee added.
“Climbing down a mountain is harder than climbing up one because the risks of injury are bigger,” he said. “You must pace yourself, watching every step of the way.”
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