The head of South Korea’s central bank said on Thursday that the trend of slowing inflation was continuing and that conditions were in place to change monetary policy at the right time, warning that market expectations of a potential interest rate cut appeared to be somewhat exaggerated.

In a widely expected decision, the Bank of Korea’s (BOK) monetary policy board kept the interest rate unchanged at 3.5 percent for the 12th consecutive session, while inflation moderated.

“There has been progress toward price stabilization and things are moving in the right direction (in monetary policy),” BOK Governor Rhee Chang-yong told a news conference.

“But there are still risks, such as currency markets, Seoul home prices and household debt. It is still unclear when the policy change will happen, and it could take longer,” he said.

The Bank of Poland (BOK) has continued to keep interest rates unchanged after freezing them in February last year, with seven consecutive increases between April 2022 and January 2023.

The interest rate freeze comes as household debt remains high despite an extended lockdown and inflationary pressures in Asia’s fourth-largest economy show signs of easing, while the country’s economy is set to expand faster than expected this year on the back of strong exports.

The BOK stated that it would maintain restrictive monetary policy for a sufficiently long period, but would assess the timing of the interest rate cut.

Rhee said two board members expect there will be a possibility of an interest rate cut within three months.

“Market expectations for a potential rate cut are somewhat high,” Rhee said. “The central bank will review the timing of any rate cut, taking into account exchange rates, household debt and housing prices.”

Korean banks’ household loans rose for a third straight month in June, mostly due to faster growth in mortgage lending. That’s keeping the central bank cautious about cutting interest rates.

“Real estate prices in Seoul and the surrounding areas rose at a faster pace, while the downward trend continued in the rest of the country,” the BOK said.

Rhee expressed concern about faster-than-expected home price growth in Seoul and the broader region.

“Housing price growth in and around Seoul is faster than expected… I am taking this more seriously than before,” he said.

The governor said earlier this week that the country could expect inflation to gradually decline.

Consumer prices rose 2.4% year-on-year in June, the lowest level since July 2023, and the central bank expects inflation to fall further in the longer term, reaching its medium- to long-term target of 2% by the end of this year.

The country continued to face high inflationary pressures last year after inflation was the fastest in decades in 2022.

“Consumer price inflation is likely to fall slightly to the lower 2 percent. It is estimated that it may be slightly lower than the 2.6 percent forecast for this year in May,” the bank said.

The freeze in interest rates came as the central bank raised its economic growth forecast for this year.

In May, the central bank raised its growth forecast to 2.5% this year, from an earlier forecast of 2.1%, but lowered its growth forecast for 2025 from 2.3% to 2.1%. The bank kept its inflation forecast at 2.6% this year.

Korea’s economy grew by a better-than-expected 1.3 percent in the first quarter, helped by a sustained recovery in exports and a rise in construction investment.

First-quarter growth beat market estimates of 0.6% and quarter-on-quarter growth of 0.6% in the September-December period.

This is the highest result since the fourth quarter of 2021, when the economy grew by 1.4%.

The economy grew by 1.4% last year, down from 2.6% the previous year and 4.1% in 2021.

The central bank’s interest rate freeze follows the Federal Reserve’s decision last month to keep its benchmark interest rate steady between 5.25 percent and 5.50 percent for the seventh straight month.

The Fed is expected to start cutting interest rates in September as inflationary pressures ease. (Yonhap)