Bank of Korea Lowers Key Interest Rate as Housing Market Shows Signs of Slowdown

In a significant policy shift, the Bank of Korea has reduced its benchmark seven-day repurchase rate by 0.25%, bringing it down to 3.25%. The decision comes as a response to signs that the housing market is cooling off and inflationary pressures have sharply decreased. This move aligns with predictions made by 20 out of 22 economists in a Bloomberg survey, while the remaining two anticipated the rate to stay at 3.5%. Those in favour of maintaining the rate believed it would help control rising home prices, which had previously contributed to household debt growth.

The rate cut highlights the central bank's growing concern over stagnant private spending and mounting credit risks, especially in the construction sector. Interest expenses have increased for borrowers on floating rates, leading to reduced consumer spending. Lawmakers have voiced their concerns about the impact on households and called on the Bank of Korea to take action, which the central bank has now done by reducing the interest rate.

This policy pivot by the Bank of Korea is in line with a broader trend seen among central banks globally, which are gradually transitioning from tightening to easing cycles. Just last month, the Federal Reserve in the United States lowered its key interest rate by half a percentage point, shifting its focus from curbing inflation to ensuring the economy lands softly. Central banks are increasingly prioritizing economic growth now that inflationary pressures have lessened, and the Bank of Korea’s decision follows this global trend.

Before this rate cut, the Bank of Korea had maintained a restrictive 3.5% rate for over 18 months. Policymakers had previously been hesitant to make any moves that might signal an early policy shift, as they feared it could reignite the housing market and potentially destabilize the broader financial system. However, with inflation cooling and the property market softening, the central bank felt it was the right time to lower rates and stimulate economic activity.

The housing market had been one of the central concerns for the Bank of Korea, as rising property prices had fueled household debt to unsustainable levels. By holding rates steady at 3.5%, the central bank had sought to prevent further overheating in the housing market. However, with the recent slowdown in property prices and inflation, the central bank’s focus has shifted towards addressing other economic challenges, such as weak consumption and credit risks tied to the construction sector.

As inflationary concerns take a backseat, the Bank of Korea’s rate cut reflects a renewed focus on supporting domestic consumption and reducing the burden on borrowers. Floating-rate borrowers, in particular, had been feeling the pinch from higher interest rates, which limited their ability to spend and invest in the economy. This new policy direction is expected to provide some relief to households and help stimulate economic activity in the coming months.

Despite this policy change, some analysts remain cautious about how quickly the rate cut will translate into tangible economic benefits. While the reduced interest rate is expected to help ease some of the pressure on borrowers, there are concerns that it may take time for the impact to be felt across the broader economy. Private consumption has been sluggish, and the construction industry continues to face significant credit risks, both of which are areas that the Bank of Korea will need to closely monitor as the new policy takes effect.

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This interest rate cut marks a pivotal moment in South Korea’s economic policy, as the central bank shifts its focus from containing inflation to supporting growth. Moving forward, policymakers will need to balance the need to stimulate the economy with the potential risks that could arise from a recovery in the housing market. For now, the rate cut provides much-needed relief to borrowers and signals the central bank’s commitment to bolstering economic momentum in the months ahead.