Searching for South Korea's "Neutral Interest Rate" ― The Next Move: Rate Cut in August or Housing Regulation?

1. Summary of the Decision

The Bank of Korea (BOK) held its policy rate steady at 2.50% on the 10th during the Monetary Policy Committee meeting (commonly known as 금통위). A survey of 33 economists conducted by Reuters also predicted a hold, aligning with the pre-meeting consensus.Investing.comReuters

2. "Cautious Dovish" Message

The statement released immediately after the decision and the press conference by Governor Lee Chang-yong revealed a "cautious dovish" tone, prioritizing economic growth and financial stability over inflation. Four out of the seven committee members hinted at "additional rate cuts within the next three months."Reuters

At the same time, the rapid expansion of household debt and the resurgence of housing prices were repeatedly mentioned as risks.Investing.comopinionnews.co.kr

3. Background: Three Pressures

1. Export Slowdown and U.S. Tariffs
   South Korea's real GDP for Q1 2025 unexpectedly contracted by 0.2% compared to the previous quarter. Additional U.S. tariffs are hitting the export-driven economy hard. The governor warned that "the tariff policies of major trading partners, including the U.S., pose significant uncertainties."Investing.com

2. Household Debt and Housing Bubble
   In June, apartment prices in the capital region surged by 0.43% from the previous month, marking the steepest rise in 6 years and 9 months. The housing loan balance of the top 5 banks increased by 6.7 trillion won in just one month.opinionnews.co.kr

3. Global Interest Rate Environment
   While expectations for a rate cut by the U.S. Federal Reserve have diminished, the RBA and RBNZ in Asia have also adopted a wait-and-see approach, making it difficult for the BOK to proceed with further easing.Investing.comInvesting.com

4. Financial Market Reaction

Following the decision, three-year government bond futures rose by 0.14 points, and the won slightly depreciated. The short-term market has priced in about a 60% probability of a "25bp rate cut in August."Investing.com

5. Sentiment on Social Media

• #금통위 (Monetary Policy Committee) reached the top trend on Twitter (X) in Korea (11 AM).

• Individual investors ("동학개미") welcomed it as a "chance for stocks to rise."

• Mortgage holders are hopeful that "additional rate cuts will ease repayment burdens."

• Meanwhile, some users in their 20s and 30s reacted coolly, saying, "Even houses will become more expensive."

Over 50,000 simultaneous connections gathered for live broadcasts by domestic media, with divided opinions in the comments section, such as "Even a 0.25% cut is just a drop in the bucket" and "Address the housing bubble before exports." *SNS posts were compiled by the author based on public information.

6. Economists' Perspectives

7. Medium to Long-Term Scenarios

• Base Case (55%)
  August ▲25bp, year-end 2.25%. Household debt grows slowly under regulation, and housing prices remain flat.

• Severe Tariff Shock (25%)
  U.S. tariffs expand further → sharp decline in exports. BOK makes an additional ▲50bp cut, policy rate to 2.00%.

• Housing Bubble Resurgence (20%)
  If real estate prices surge, rate cuts are withheld, maintaining 2.50%, and lending regulations in the capital region are strengthened.

8. Impact on Businesses and Households

• Export Sector: Short-term competitiveness secured by curbing won appreciation. However, if trade friction persists, the effect is limited.

• Small and Medium Enterprises: Variable interest rate-linked loans from policy financial institutions remain at current levels, improving cash flow.

• Households: Variable-rate mortgages remain unchanged, and card interest rates are stable. However, if inflation remains in the 2% range, real interest rates decline, leaving room for consumption recovery.

9. Reading BOK's "Skill" in International Comparison

While the Bank of Japan takes time with "YCC adjustments" and the RBA/RBNZ hint at "prolonged high interest rates," the BOK aims to balance "growth and financial stability" with a hybrid strategy of "preemptive rate cuts + temporary pause." This is noted as a post-New Keynesian model case originating from East Asia.

10. Summary and Outlook

Holding at 2.5% seems quiet at first glance, but it encompasses a "two-stage scenario" of "another rate cut in August, but brakes depending on the housing bubble." On social media, expectations and concerns are mixed, and domestically, the "household debt debate" is spreading. The BOK faces a difficult balancing act in August and beyond, especially after the U.S. presidential election results become clear in the fall.