(Bloomberg) -- The Bank of Korea may cut its benchmark interest rate even before the housing market shows definitive signs of cooling, a board member said, pointing to the growing need to shore up the domestic economy.
“Can we afford to wait until there’s a clear slowdown? I don’t think so,” Shin Sung Hwan said Wednesday at a Bank of Korea press conference. “We don’t mean that we can lower the rate only when housing prices stabilize 100%.”
The comments by Shin, who called himself a “well-known dove” at the start of his remarks, came on the same day Finance Minister Choi Sang-mok made the case at a separate venue for prioritizing policies that boost private spending over those aimed at curbing household debt. “I think recovering consumption is at least a little more important in the short term,” Choi told a televised conference.
Taken together, the remarks will fuel speculation that the BOK will seize on early signs of a cooling in the housing market to go ahead with a policy pivot at its next decision on Oct. 11.
The BOK has refrained from cutting its rate in recent months amid concern that lower borrowing costs would fuel appetite for household debt. Real estate prices are among the key areas the BOK has been monitoring as rising property prices can spur demand for mortgages from consumers scrambling to buy homes before they get too expensive.
Developments in key overseas markets add to uncertainties for policymakers weighing the state of external demand. Traders have been ramping up wagers on another rate cut by the Federal Reserve after it embarked on an easing cycle last week. And China this week unveiled unusually broad steps to revive growth that’s been stifled in part by a moribund property market.
What Bloomberg Economics Says...
“The BOK’s October meeting is now harder to call. The urgency for a 25-bp rate cut we’re expecting may have waned. It will come down to how the board assesses the impact of the PBOC’s move.”
— Hyosung Kwon, economist
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Domestic factors are also still more or less balanced. Stressing he doesn’t represent the entire board, Shin said the housing market has emerged as a concern for him since the start of summer. Those worries kept him from calling for a cut to the benchmark rate at the July meeting.
The BOK has held its policy rate at a restrictive 3.5% since early last year. Many economists expect the board to reduce the benchmark when it meets next month as consumer inflation slows.
The risk of another delay persists as the BOK waits for more evidence that the housing market will continue to slow.
“Conditions are still tough,” Shin said, warning against jumping to any conclusions about the October decision.
South Korea has one of the highest ratios of household debt to gross domestic product in the developed world, which presents a major hurdle to the BOK’s mandate to safeguard financial stability.
Even as exports are helping the economy grow faster than initially projected, private consumption fell 0.2% in the second quarter from the previous three months, while retail sales slid 1.9% in July from a month earlier, the latest government data showed.
“Our country’s situation is not that easy,” Shin said. “Looking at consumption and other things, there’s growing need for a rate cut.”
(Updates with economist’s remarks)
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