Decision to lower key rate elicits mixed reactions

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Decision to lower key rate elicits mixed reactions


A view of a reconstruction site at Singil New Town, in western Seoul. After the Bank of Korea’s rate cut, some analysts argue it will have a positive impact on the real estate industry since homebuyers and builders will have lower interest rates on their loans. [JOONGANG PHOTO]

Industry insiders have mixed views on the Bank of Korea’s decision to lower its key interest rate from 1.5 percent to an all-time low of 1.25 percent.

Some expect it will have a positive impact on the domestic real estate and stock markets. In particular, they said homebuyers will have lower interest rates when taking out loans from local financial institutions, largely thanks to the rate cut.

Others, however, believe the decision might lead to a further increase in household debt.

“Mortgage rates will eventually fall as well following the key interest rate, and this will increase the demand for buying new homes,” said Kim Hyung-geun, an analyst at NH Investment & Securities. “And construction firms will have fewer burdens when financing their projects. We are estimating that there will be some 350,000 to 390,000 new units out in the market by this year.”

A number of analysts agreed that the rate cut will boost liquidity and might have a positive impact on the local stock market, which has been nicknamed the “boxpi” - a portmanteau of “boxed in” and Kospi - because of how stocks have not fallen or risen past a certain level for some time.

“Theoretically speaking, the rate cut helps boost liquidity,” said Kim Sang-hoon, a fixed-income analyst at KB Investment & Securities. “There are both good things and bad things about lowering the rate. A good thing is that it will stimulate the economy, but a bad thing is that it will raise average household debt in general.

“Companies should expand their facilities investments and hire more people, but they might be reluctant to do so if they believe the rate cut will have no positive impact on the economy in the long run. In this case, all the money might move into the real estate and stock markets, which carry relatively higher risks, rather than boosting the real economy.”


According to Kim, debt tends to go up when the economy starts to grow. But he warned that there needs to be certain measures set out by the government to minimize the damage from high debt levels.

“Monetary policy is a macroeconomic policy that takes a long time for the outcome to show, and the government needs to plan out some microeconomic policies to reduce the damage from high debt and capital outflow,” Kim said.

Household debt, including credit card loans and purchases, had recently been slowing down but is expected to see sharper expansion in the second half.

In fact, household debt hit 1,223.7 trillion won ($1.04 trillion) in the first quarter of this year, according to the Bank of Korea. That’s a rise of 1.7 percent compared to the end of last year and 11.4 percent from the first quarter of last year.

“I am not sure whether sale prices for homes will go up, but those of jeonse [lump-sum deposit rental contract] homes might rise, since homeowners will have to have more money received from new renters to pay back the amount they received from current renters that are moving out due to the low interest rate,” said Kong Dong-rak, a fixed-income analyst at KoreAsset.

Many analysts also said that a possible U.S. rate increase will have limited impacts on Korea, and that there is a chance the central bank might lower the rate even further this year.

“Some worry that the rate difference between Korea and the United States might lead to capital outflow, but the government can manage this through various measures,” Kong said. “In May, the Bank of Korea unanimously decided to freeze the rate, and they changed their mind in just a month. It appears that their views on Korea’s economy have changed rapidly and that they found out the economy might turn out worse than what they expected before.

“We were expecting the Bank of Korea to lower the rate near July, but it came earlier than we thought,” he said. “We think there is a chance that the central bank could lower the rate once again by the end of this year regardless of the U.S. rate increase.”

Meanwhile, the Bank of Korea’s rate cut announced on Thursday has also affected the local stock market.

Securities shares rose 0.65 percent, while the insurance sector tumbled by 2.1 percent.

Securities shares went up as investors expected more money to pour into the stock market after the rate cut, since it can offer higher returns than storing money in financial institutions due to the low rate.

Insurance shares, on the other hand, fell because the related companies might have to pay insurance policyholders more money based on the loftier interest rates they were offered when the key rate was higher.

SK Securities gained 2.22 percent from the previous day to close at 1,150 won, and Hyundai Securities jumped 1.49 percent to 6,810 won.

Samsung Life Insurance, on the other hand, fell 2.37 percent to 103,000 won, and Mirae Asset Life Insurance dropped 2.22 percent to 4,400 won.


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