Bank of Korea Expected to Pivot as Property Market Cools

The Bank of Korea is widely expected to cut its benchmark interest rate on signs housing markets are cooling and after inflation eased below its target, joining an increasing number of global peers in starting an easing cycle to safeguard economic momentum.

(Bloomberg) — The Bank of Korea is widely expected to cut its benchmark interest rate on signs housing markets are cooling and after inflation eased below its target, joining an increasing number of global peers in starting an easing cycle to safeguard economic momentum.

Twenty of 22 economists surveyed by Bloomberg expect South Korea’s central bank to cut the rate by a quarter-percentage-point to 3.25% when the board gathers Friday. The remaining two predicted authorities will extend a record-long holding pattern until they see clearer signs that property prices will ease enough to discourage households from ramping up debt.

The BOK has kept its rate at 3.5% since early 2023. While inflation has trended lower all year, ultimately dipping below the BOK’s target, officials extended the hold pattern due to concerns over hot housing markets in Seoul. With apartment prices and transactions having lost momentum since August, the bank is now seen as having scope to shift its focus to reviving domestic consumption.

A 50-basis point rate cut by the Federal Reserve last month and moves to ease policy by other central banks in countries from Canada to China have also opened the way for looser policy settings in Korea.

“With the Fed paving the way and starting with a 50-bp cut in September, it provides more wiggle room for the BOK to ease in October,” Kelvin Lam, a Pantheon Macroeconomics analyst, said. “Our base case is for the BOK to start cutting interest rates by 25 basis points in its October meeting, with a chance that the first cut could be delayed to November due to financial stability concerns.”

What Bloomberg Economics Says…

“The likelihood of a Bank of Korea rate cut in October — our base case — depends on the evolution of house prices and household debt, with the central bank concerned about financial-stability risks.”

— Hyosung Kwon, economist

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If the BOK does indeed cut, it’s likely to accompany the move with cautious comments. South Korea has one of the highest ratios of household debt to gross domestic product and Governor Rhee Chang-yong has been vocal about the need to rein in the appetite for mortgage loans.

The BOK has two rate decisions left for the remainder of the year, including November. During a visit to the Finance Ministry late last month, Rhee declined to address questions on the outlook for the next decision and the possibility of a successive cut should the pivot begin in October.

“With no near-term housing price stabilization, we expect the BOK to remain cautious,” Benson Wu, a Bank of America economist, said. “we are still inclined towards a November rate cut.”

Here is what to watch for:

• The decision is expected around 9:50 a.m. in Seoul, with a statement due around 10:30 a.m. Rhee usually starts his comments around 11:10 a.m.
• The vote will be key, with any dissenters signaling lingering hawkishness. In August the seven-person board voted unanimously to hold steady.
• Rhee’s summary of three-month rate expectations for policy will also be closely watched.
• The BOK is expected to cite economic activities that a rate cut could help support in explaining why it’s decided to pivot now. Rhee’s comments could offer insight into the state of the economy at a time when exports continue to grow at a robust pace while domestic consumption remains stagnant.
• Most economists predict a hawkish cut, with Rhee likely to downplay the likelihood of a move when the board’s last meeting this year concludes on Nov. 28.

—With assistance from Tomoko Sato and Whanwoong Choi.