Lee Chang-yong "Likely to maintain a rate-cutting stance until the first half of next year"…likely to cut twice

Expectations of rising Seoul metropolitan area housing prices remain

Beware of 'signals' that could fuel household debt

Korea-U.S. summit results also give central bank policy some breathing room

Indicates possible rate cut in October

Two cuts … Possibility of maintaining an annual 2.0%

Lee: "Will judge timing while watching the economic outlook"

Achieving this year's growth rate in the 1% range is difficult

It seems growth will remain below potential next year; the governor, with two consecutive holds … "adjusted the timing of rate cuts"

The Bank of Korea on the 28th held a Monetary Policy Board monetary policy meeting and left the benchmark interest rate unchanged at an annual 2.50%. This was interpreted as a second consecutive hold following last month, taking into account trends such as the continued rise in housing prices in the Seoul metropolitan area. Bank of Korea Governor Lee Chang-yong said, "There is a high likelihood of maintaining a rate-cutting stance until the first half of next year," leaving open the possibility of two rate cuts.

Two consecutive holds due to concerns over housing prices in the Seoul metropolitan area

Governor Lee held a press briefing at the BOK annex conference hall on Namdaemun-ro in Seoul immediately after the Monetary Policy Board meeting and explained the background for keeping rates unchanged: "There is a need to stabilize expectations of rising housing market prices." He said the upward trend in housing prices in the Seoul metropolitan area has not yet been curbed and that the decision took into account the situation in which the government is preparing to announce additional real estate measures. While saying "interest rates cannot be used to bring down housing prices," he emphasized, "We will not excessively supply liquidity so as not to encourage expectations of rising housing prices."

The results of the Korea-U.S. summit were also cited as a background for keeping rates unchanged. Governor Lee said of the negotiations, "I think they were positive and smooth," and added, "Had the result come out negatively, unlike the tariff negotiation results earlier this month, the conflict between growth and financial stability would have been more severe, making it considerably burdensome to decide to hold rates."

The central bank presented this year's economic growth forecast at 0.9%. Despite the supplementary budget, this is 0.1 percentage point higher than May's 0.8%. Next year's growth forecast was maintained at 1.6%.

Maintaining this year's growth at 0.9%

Although the monetary policy meeting left rates unchanged, it was largely interpreted as dovish. Of the six Monetary Policy Board members excluding the governor, five suggested keeping the option of cutting rates within three months open, while one argued for keeping rates unchanged. Compared with the July meeting, one more member favored a rate cut. Separately, board member Shin Sung-hwan submitted a dissenting opinion at the meeting calling for a 0.25%-point cut to the policy rate. Shin argued, "Because the upward trend in real estate prices has eased and the U.S. Federal Reserve is likely to cut rates in September, it is desirable to preemptively cut rates to respond to the economy."

The outcome of this meeting was assessed to have spread market expectations that rates could be cut in October. Governor Lee also emphasized at the briefing that the rate-cutting stance has not changed. He said, "It is a matter of adjusting the timing of cuts in the course of coordinating with the government on real estate policy," and added, "The easing stance has not been reduced."

Governor Lee explained this by citing the need to continue a rate-cutting stance to support growth recovery. Although this year's growth forecast was slightly raised, he projected that achieving growth in the 1% range would fail and that it would be difficult to avoid growth below the potential rate next year.

Low-growth trend until the first half of next year

Governor Lee said, "I expect the low-growth trend to continue until the first half of next year and recover to a potential growth rate level in the second half," and explained, "There is a high likelihood that the easing stance will continue until the first half." The market interpreted this as indicating two rate cuts. The scenario is cutting the rate to an annual 2.25% by the end of this year and then cutting once more in the first half of next year to maintain around an annual 2.0%. If the real estate situation is not calmed by October, there is also a view that the timing of cuts could be pushed to November. Governor Lee, however, declined to answer directly when asked whether the policy rate could fall to the 1% range, saying, "We will have to reassess the economic outlook in the first half of next year and make a judgment."

He also said the Bank of Korea plans to resume the second phase of its digital currency project 'Hangang.' The project was halted after the first-phase test ended last month due to opposition from the banking sector over investment amounts. Governor Lee said, "We plan to implement a project to disburse 110 trillion won in government subsidies via digital currency together with the Ministry of Economy and Finance," adding, "It will be carried out as part of the second phase of Project Hangang." He added, "This time, we will focus on banks that demonstrate a willingness to develop technology and are willing to invest actively."

Reporter Kang Jin-kyu josep@hankyung.com