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BOK likely to keep rate frozen due to heated housing market: experts

A view of apartment complexes near Namsan, a mountain in central Seoul. (Yonhap)
A view of apartment complexes near Namsan, a mountain in central Seoul. (Yonhap)

South Korea’s central bank is expected to keep its base rate frozen near-zero at its regular monetary policy meeting scheduled Thursday, to avoid further aggravation of the local housing market, experts said Sunday.

According to experts, the Bank of Korea will maintain its policy rate at the current record-low of 0.5 percent for the time being, despite rate cut pressures stemming from economic downturns due to the coronavirus pandemic coupled with the trend of low inflation. This is mainly due to the housing market, which has been heated by an inflow of liquidity amid low interest rates.

“The BOK doesn’t make its policy decisions based solely on the real estate market, but another rate cut could trigger an excessive liquidity flow into the Seoul housing market – which is always in high demand,” Sung Tae-yoon, an economics professor at Yonsei University said.

The government has been rolling out a series of measures in recent years -- including tightening mortgage rules and levying heavier tax on real estate owners -- to control and curb the overheated housing market. The BOK is likely to keep pace with the government’s steps on the real estate market, experts said.

“It would be burdening for the BOK to carry out a rate cut because it could lead to capital concentration in the real estate market,” Meritz Securities analyst Yoon Yeo-sam said.

“Considering the third extra budget of 35.1 trillion won ($29.3 billion) and the overall expanding budget for next year, fiscal authorities are likely to stick with simpler policies such as government bond buying,” he added.

On top of it, BOK Gov. Lee Ju-yeol has said that the policy rate has gone very close to “the effective lower bound,” when the policy board slashed its rate by a quarter of a percentage point to 0.5 percent in May, indicating the monetary policy board’s reluctance toward further rate cuts.

“If the financial market becomes somewhat stabilized in the second-half of the year, there will be no additional rate cuts,” Kiwoom Securities analyst Ahn Ye-ha said.

“With the US Federal Reserve saying they would maintain interest rates close to zero until at least the end of 2022 and the European Central Bank’s similar stance, the BOK is likely to keep the rate at current level until the end of the year,” she added.

The BOK’s monetary policy meeting -- the first in the second-half of the year -- is slated to fall two days after President Moon Jae-in’s briefing on details of his administration’s “New Deal” package, which aims to create jobs and minimize economic fallout from the COVID-19 pandemic.

By Jung Min-kyung (