BOK chief warns household debt near tipping point, keeps rates steady

Rhee Chang-yong, governor of the Bank of Korea (BOK), warned on Thursday that mounting household debt is now undermining both private consumption and economic growth.

He cited the sharp rise in home prices in the Seoul metropolitan area and the rapid growth in mortgage lending as key factors behind the unanimous decision to keep the policy rate unchanged at 2.50% for a second consecutive month in July.

“Household debt is now near a tipping point that significantly constrains consumption and growth,” Governor Rhee said at a press conference after the monetary policy meeting. “Taming expectations (for further home price gains) and managing household debt remain our key policy priorities.”

His remarks follow the government’s stronger-than-expected measures to rein in mortgage loan growth and the passage of a new extra budget by the National Assembly last week.

Rhee said the central bank needs time to assess the impact of the policy measures that took effect in late June before implementing any further rate moves.

On June 27, the government announced a cap on mortgage loans of 600 million won ($440,000) per household for homes in the Seoul metropolitan area, regardless of income.

It represented the government's toughest policy measure in decades to cool the overheated housing market.

A rebound in exports and stabilizing inflation offered temporary relief to Asia’s fourth-largest economy, despite growing uncertainty from US tariff hikes, Rhee said.

The governor reiterated his dovish outlook for the South Korean economy and reaffirmed the bank’s monetary easing stance.

Exports are expected to decrease on the back of the Trump administration's tariff hikes, although the latest supplementary budget will likely boost consumer confidence.

"Excluding myself, four of our six monetary board members expressed their view that we need to leave the door open for lowering interest rates below 2.5%," Rhee said. "The other members see a high likelihood that interest rates remain at 2.5% even three months from now."

In July, the BOK governor emphasized a cautious approach to monetary easing, warning that aggressive rate cuts could fuel asset bubbles and heighten currency volatility.

Inflation is expected to stay in the 2% range in line with the BOK’s forecasts in May. Rhee pointed to stabilizing crude oil prices and weak demand as key factors keeping inflation in check.

“We’ll maintain our monetary easing stance to mitigate downside risks to growth, but will calibrate the timing and pace of any further rate reductions,” Rhee told reporters.

Write to Jin-gyu Kang at joseph@hankyung.com

Yeonhee Kim edited this article.