Bank of Korea Governor Rhee Chang-yong speaks during a press conference at the central bank's headquarters in Seoul, Aug. 22. Yonhap
Market observers expect the Bank of Korea (BOK) to end its interest rate freeze policy after three years and two months, as the central bank's monetary policy decision on Oct. 11 approaches.
While uncertainties remain regarding household debt, they suggest that other conditions, such as weak inflation and sluggish domestic demand, are favorable for a rate cut.
Currently, the most widely supported forecast is that the BOK will lower interest rates by a quarter percentage point three times by the first half of next year — one cut this year, followed by two more next year.
During a press conference on Sept. 25, Shin Sung-hwan, a member of the BOK's monetary policy board, also said, "The need for a rate cut is increasing."
"We don't need to wait for housing prices to fully stabilize before implementing a rate cut. A comprehensive assessment of the economic slowdown should be conducted to determine its necessity," he said.
Market anticipation for a rate cut is significantly driven by record-low inflation.
In September, consumer prices rose by 1.6 percent year-on-year, marking the lowest point since March 2021. After remaining in the 3 percent range until March, inflation fell to the 2 percent range in April and eventually dipped to the 1 percent range.
"The groundwork for price stabilization is being established," BOK Deputy Governor Kim Woong said at an inflation monitoring meeting, Wednesday.
Another pressing issue is sluggish domestic demand.
Retail sales, which reflect consumer trends, have been weak throughout this year, with a decline of 0.6 percent in April and 0.2 percent in May, followed by a modest 0.9 percent increase in June and another 0.2 percent decline in July. While there was a surprising 1.7 percent increase in August, it remains uncertain whether this indicates a long-term trend.
Similarly, industrial production fell by 0.8 percent in May and 0.6 percent in both June and July, before experiencing a slight rebound in August.
These underwhelming figures have led the government and the ruling People Power Party, struggling with a tax shortfall, to publicly urge the BOK to lower policy rates — a rare move given the central bank's independent control over monetary policy.
However, the biggest obstacle preventing the BOK from a dovish approach is the high level of household debt.
The total household loan balance at Korea's five major banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — reached 730.9 trillion won ($541.9 billion) in September, an increase of about 5 trillion won compared to August.
This growth is significantly smaller compared to the 9.6 trillion won increase seen in August. The implementation of a stricter debt service ratio standard last month, along with major banks introducing strict measures to curb lending, seem to have effectively slowed down the pace.
But it remains uncertain whether this slowdown reflects a lasting trend. The data for September was influenced by fewer business days due to the Chuseok holiday, making it challenging for the BOK to assess the trajectory based on just one month of figures.
Recent geopolitical risks are also adding pressure.
In the wake of the military conflict between Israel and Iran, global oil prices have surged by 9 percent in just one week, marking the largest weekly increase since January 2023. Concerns persist that prices could surge further depending on how the situation unfolds.