Bank of Korea keeps rates steady as it assesses measures to cool Seoul's housing market

South Korea's central bank held its policy rate at 2.5% Thursday, as it assesses the impact of recent measures aimed at cooling Seoul's housing market.

Housing prices in Seoul spiked over 19% in June on an annualized basis, according to Goldman Sachs, prompting financial authorities to step in with measures to address rapidly expanding household loans.

The Bank of Korea noted a "significant acceleration in housing prices in Seoul and its surrounding areas, [as well as] household debt."

The central bank had lowered rates in its last policy meeting in May at a time when the country was in the midst of a political turmoil while also facing steep tariffs on auto and steel exports from the U.S.

The central bank is, however, expected to cut rates in its next policy meeting as measures to cool the housing market in Seoul take effect. Goldman Sachs said in a note last week that the introduction of new mortgage lending restrictions would "open the door" for a rate cut in the BOK's August meeting.Lee forecasts that the BOK will cut rates twice this year — most likely in August and November — as core inflation in South Korea is on target and the won has stabilized against the dollar, but the bank will likely opt for an "extended hold" after these two cuts due to household debt concerns.

The BOK on Thursday said it was critical to evaluate the effect of macro policies given the rise in risks associated with the housing market in Seoul and rising household debt, while also "remaining cautious about the possibility of heightened volatility in the foreign exchange market."

Goldman in its note pointed out that household loan growth in Korea surged to 6 trillion won ($4.27 billion) in May — the fastest pace since last October — and is estimated to have reached 7 trillion won in June."The housing market in Seoul and its surrounding areas, which had previously shown signs of overheating, appears to be stabilizing somewhat following the implementation of the government's household debt measures," the BOK said Thursday.  

South Korea faces economic headwinds as U.S. President Donald Trump has threatened to impose 25% tariffs on all South Korean imports starting Aug. 1, if the country fails to reach a trade deal with Washington.

The country's benchmark Kospi index was up 0.74%, while the won strengthened marginally to trade at 1,372.48 against the dollar.

"The BOK thinks [the] higher debt burden has weakened households' spending power. At the same time, strong debt-financed demand for housing [has] resulted in distorted capital allocation across the economy, leading to more allocation of capital to not-productive sectors."