"Household debt increasing faster than expected"...Will Bank of Korea slow down interest rate cuts?

Warning on spreading house price increases in Seoul

"As housing transactions increase, debt rises

with a 1-2 month lag...we're watching carefully"

Additional rate cuts in first half may not happen

The Bank of Korea has assessed that the recent increase in household debt and housing transaction volume is 'beyond expected levels.' They also issued a warning message that they would "take policy responses" if house prices rise and household debt surges. Forecasts suggest that the BOK, which plans one or two additional rate cuts this year, may slow down the pace of cuts depending on circumstances.

Park Jong-woo, BOK's Deputy Governor for Monetary Policy, said at a press briefing after publishing the Monetary Policy Report on the 13th, "Household loans increased slightly more than expected last month," adding that "until February, we assessed the household debt growth as 'stable,' but there is great uncertainty whether this assessment can be maintained afterward." According to the Financial Services Commission and BOK on the 12th, household loans in the financial sector increased by 4.3 trillion won last month. Although they decreased by 900 billion won in January, they turned to an increase just a month later.

Even the day before, authorities had stated that "on average for January-February, the slowdown in household loans continued," but concerns grew at today's briefing. Deputy Governor Park said, "Housing transaction volume has increased more than expected since February," adding, "As debt increases with a 1-2 month lag after housing transactions increase, we are watching carefully."

The BOK is paying close attention to market conditions following the lifting of land transaction permit systems in some Seoul areas. Deputy Governor Park emphasized, "We are concerned that the steep rise in house prices seen in some Seoul areas may spread to surrounding areas," adding, "If the upward trend spreads, we will respond with various policy coordination measures."

With the BOK mentioning policy coordination to prevent household debt increases today, there's a possibility that the BOK may slow down the pace of base rate cuts. Initially, the market expected the BOK to hold rates at next month's Monetary Policy Committee meeting and then cut again around May or July.

However, if household debt increases significantly in March-April, the possibility of a May rate cut is expected to decrease substantially. This means there might not be additional rate cuts in the first half of the year. The 1-2 additional cuts mentioned by BOK Governor Lee Chang-yong may be closer to 1 than 2.

The BOK estimated that due to the 0.75 percentage point cut in the base rate over three occasions from October last year to February this year, the household debt growth rate would increase by an additional 0.60 percentage points this year and 1.53 percentage points next year.

BOK Monetary Policy Board member Shin Sung-hwan stated, "Future monetary policy will focus on easing downward pressure on the economy, but the timing and pace of additional cuts will be determined with consideration for financial stability conditions such as household debt, housing prices, and exchange rates."

Reporter Kang Jin-kyu josep@hankyung.com