If interest rates are lowered, household debt and housing prices will explode
Concerns over sluggish domestic demand due to freeze
Domestic demand and housing price dilemma, October vs. November cuts are tight
Voices for October rate cut expected to grow louder due to sluggish domestic demand
The U.S. Federal Reserve (Fed) has entered a cycle of interest rate cuts, lowering its benchmark interest rate for the first time in four and a half years since March 2002. However, the Bank of Korea’s monetary policy concerns are not completely resolved due to domestic circumstances that make it difficult to lower interest rates, such as concerns over skyrocketing housing prices in the metropolitan area and the resulting surge in household debt.
The Bank of Korea has been hinting that it will move interest rates after checking the housing prices and household debt stabilization trend according to the government’s macro-prudential policy implementation status. In September, the last loan demand at the end of August will disappear, and household loans are expected to slow down due to the Chuseok holiday, so the outlook for rate cuts in October and November is expected to be closely matched depending on whether it is a trend decline or a temporary one.
◆US Interest Rate Cut Begins… Additional 0.5%p Cut Suggested Within the Year
According to the financial sector on the 19th, the FOMC (Federal Open Market Committee) held a regular meeting on the 18th (local time) and lowered the base interest rate by 0.5% from the previous 5.25-5.5% to 4.75-5.0%. With 11 in favor and 1 against, it was the first cut since March 2020. Director Bowman, who is classified as a hawk, requested a cut of 0.25%.
In addition, the FOMC predicted an additional 0.5% point cut by the end of the year through the dot plot. The interest rate is expected to fall by 0.1% point next year and 0.5% point in 2026, falling to the range of 2.75% to 3.00%. The economic growth rate forecast for this year was lowered to 2.1% from the previous 2.0%. The unemployment rate was raised to 4.4% this year, up from the current 4.2%.
Federal Reserve Chairman Jerome Powell dismissed the possibility of a recession, saying, “There is no economic indicator that suggests a recession is becoming more likely right now,” and “economic growth is strong and the labor market is very strong.”
◆Prices are also stabilizing due to the US interest rate cut… but ‘house prices’ are a hindrance
If we look at the results, the Bank of Korea should simply lower interest rates in line with the fact that the US has finally taken a big cut due to concerns about an economic recession. With prices in our country falling to the 2% range, the conditions for a cut have been created. Governor Lee Chang-yong said at a conference early this month, “Now is the time to think about the appropriate timing for how to move (interest rates).”
The problem is that the sharp rise in housing prices and household debt is limiting the rate cut. According to the Korea Real Estate Board, the price of apartments sold in Seoul in the second week of September rose 0.23% from the previous week, rising for the 25th week. The increase was also 0.02% points higher than the previous week. The weekly apartment sale price nationwide rose 0.07%, increasing the increase from the previous week (0.06%).
As a result, household loans are skyrocketing. According to the Financial Services Commission, household loans in the financial sector last month increased by KRW 9.8 trillion from the previous month, recording the largest increase in three years and one month since July 2021 (KRW 15.3 trillion). Mortgage loans from deposit banks increased by KRW 8.2 trillion in one month.
At a monetary credit policy report briefing held on the 12th, Deputy Governor of the Bank of Korea Park Jong-woo diagnosed, “The scale of household loan growth in September is expected to decrease, but since housing prices have a large trend, it is difficult to say that this will actually decrease significantly in the short term.”
Household debt growth may slow down in September compared to the previous month due to the last-minute demand for loans in August, just before the government tightens lending regulations, and the Chuseok holiday. However, it is difficult to lower the level of housing prices that have risen once, and it is difficult to say for sure that the growth rate will slow down as the rise in Gangnam has spread to all of Seoul and the metropolitan area.
◆“Housing price and household loan trends need to be seen until October”
In the market, there is talk of the possibility of hesitation in the October rate cut, as the conditions for the rate cut, the stabilization of prices and the narrowing of the Korea-US interest rate gap, have been achieved, but housing prices and household debt are unlikely to be controlled for the time being. This is because, although household loans in September may be controlled due to the Chuseok holiday effect, trends must be observed until October for an accurate judgment.
Foreign exchange market volatility is also a problem. The exchange rate may stabilize due to the U.S. interest rate cut, but if the Bank of Korea immediately lowers interest rates, the exchange rate may fluctuate again. With the Bank of Japan recently announcing an interest rate hike, the interest rate gap between Korea and Japan may narrow, causing foreign capital to flow out to Japan.
Cho Yong-gu, a researcher at Shinyoung Securities, said, “Considering the monetary credit policy report meeting, there was a mention of the need to manage indicators from September and October, so there is a high possibility that the interest rate cut will be in November,” adding, “Given that household debt and housing prices in the metropolitan area were directly mentioned, I expect that around two people will express a minority opinion in favor of a rate cut in October.”
He added, “Instead, with the Big Cut, the timing of the Bank of Korea’s second rate cut is expected to come sooner,” and “After initially deciding on a rate cut in November of this year, we thought it would be difficult to make an additional rate cut in the first quarter of next year, but with the Fed’s Big Cut, it seems possible that the Bank of Korea will make an additional rate cut as early as February of next year.”
◆Korea-US interest rate gap narrows to 1.5%p… Voices for interest rate cut expected to grow louder
On the other hand, as the Korea-US interest rate gap narrowed to 1.5%, some argue that the Bank of Korea does not need to maintain 3.5%. There is also an outlook that the strengthened lending regulations will take effect starting in September. As of the 12th of this month, the balance of the five major banks’ housing loans increased by only 2.2 trillion won compared to the previous month. In September, the five major banks’ housing loans increased by 8.9 trillion won.
Joo Won, head of the economic research lab at Hyundai Research Institute, said, “If we only look at domestic demand, the Bank of Korea’s interest rate cut is urgent,” adding, “With the U.S. embarking on a big cut, our country also has the capacity to lower its base rate, and the possibility that the Monetary Policy Committee will choose a cut in October has also increased.”
Kim Dae-jong, a professor of business administration at Sejong University, said, “While domestic demand is in shambles, household debt is high, but the delinquency rate is not high.” He added, “As the U.S. has lowered interest rates, the Bank of Korea should also lower its base rate by 0.25 percentage points at the October Monetary Policy Committee to quickly stimulate the economy.”
As the U.S. embarks on a big cut, calls for a rate cut from the political world are expected to grow louder. Immediately after the Monetary Policy Committee meeting in August, a senior official in the presidential office criticized, “It is regrettable that interest rates were not lowered despite concerns about sluggish domestic demand,” and Prime Minister Han Duck-soo also pressured, saying, “There is now a little more room to lower interest rates” due to price stability.
Earlier this month, the Korea Development Institute (KDI), a government-funded research institute, once again expressed its opinion that a rate cut is necessary, saying, “The recovery of domestic demand is being delayed due to the high interest rate trend, which is limiting economic improvement.” Jeong Gyu-cheol, director of the KDI, also mentioned the Bank of Korea’s practical theory, saying, “We should have lowered the interest rate in August.”
[서울=뉴시스]
2024-09-19 07:33:17