Asian stock markets, including South Korea, tumbled over the past few days as weak U.S. jobs data sparked fears that the world’s biggest economy could be headed for a recession. This is likely to complicate the Bank of Korea’s monetary policy further, in addition to other economic woes, including sluggish domestic spending, rising real estate prices, and a surge in household debt.
The Federal Reserve faces criticism for stoking recession fears by not cutting interest rates earlier after the global stock market meltdown. Analysts say while the BOK may have to deal with similar criticism if the Monetary Policy Board is slow to react to recession fears, it is unlikely that the BOK will lower rates before the Fed, especially when household debt continues to grow and real estate prices are on the rise. The central bank’s Monetary Policy Board is set to decide on the benchmark interest rate in its next meeting on August 22.
“We cannot miss the right time for rate cuts like the U.S.,” said Yoon Sang-hyun, a People Power Party lawmaker, on August 2. “We should preemptively cut the key interest rate by 0.25 percentage points at the August meeting, followed by another 0.25 percentage point cut in October,” he suggested.
South Korea’s headline inflation has been hovering slightly above the BOK’s 2% target for the past four months. From an inflation standpoint, the BOK could consider lowering rates. But other factors, such as rising real estate prices and increasing housing demand, prevent the BOK from beginning rate cuts. Mortgage loans increased 26.5 trillion won ($19 billion) in the first half of this year from a year ago, the largest increase in three years, according to the BOK.
The central bank faces a dilemma: lowering rates could drive up real estate prices while keeping rates unchanged might weaken domestic demand. “Rising real estate prices in the greater Seoul region, increasing household debt and heightened volatility in the foreign exchange market are risks that could adversely affect financial stability in Korea,” said BOK Deputy Governor Yoo Sang-dae.
