Korea Keeps Interest Rates Steady for 5th Time

The Bank of Korea on Thursday decided to keep the base interest rate steady at 3.5 percent for the fifth time in a row.

But BOK Governor Rhee Chang-yong told reporters that the likelihood of the base rate falling again to one or two percent like it did a decade ago is very slim -- a warning to consumers to be careful before taking out housing loans in the belief that interest rates will fall again soon.

"There seems to be an increasing view that interest rates will fall and that the time has come to take out loans to buy homes since residential property prices have bottomed out," Rhee said. "But household loans have been rising again for two straight months." Housing loans increased by W14 trillion in the second quarter causing overall household debt to rise to W1.86 quadrillion (US$=W1,323).

"The belief that home prices have bottomed out has somehow persuaded people that rates will go down, prompting them to take out loans to buy homes. But interest rates were unusually low over the past decade, and the young generation has not experienced inflation and must exercise caution before buying a home thinking interest rates will go down."

The BOK's decision to keep the base rate steady stemmed from concerns of stagnation plus surging household debt, which seem to have outweighed concerns about the widening gap between interest rates in Korea and the U.S.

The BOK last raised the base rate by a quarter percentage point in January, but since then the U.S. Federal Reserve has raised its policy rate from 4.25 to 5.5 percent.

Rhee said all six members of the Monetary Policy Committee left open the possibility of raising the base rate by another quarter percentage point this year.

The BOK maintained its economic growth forecast for Korea this year at 1.4 percent but lowered the 2024 outlook by 0.1 percentage point to 2.2 percent.

"A rapid economic recovery in China appears increasingly unlikely, which will have a staggered impact on Korea," Rhee explained.

Korea's prospects could worsen by November, when the BOK will make its next forecast. China's economy is sputtering at a rate that requires officials to continue lowering interest rates and boosting money supply, while Korea's IT industry, which was expected to improve in the second half of this year, is still in the doldrums.

If China's real estate crisis continues, Korea's growth could fall to the low one-percent range, according to the BOK, and in that case it could fall below two percent next year.

But Rhee said, "Is the economy slow? That's true. But is our economy the only one that's faring poorly? The global economy is the same."

"Economic growth of 1.4 percent is low on an absolute scale but is not low enough to require support through interest rates or fiscal measures, and doing so could hinder corporate restructuring," he added.