The Bank of Korea strengthens its hawkish turn: The overheated property market and leveraged investments have exacerbated financial imbalances, and it will restart rate hikes at the "appropriate time."

The Bank of Korea further strengthened its hawkish stance, stating that due to rising housing prices, high household debt, and increasing leverage investments posing a threat to financial imbalances, authorities may need to further raise interest rates at an appropriate time. In its semi-annual Financial Stability Report released on Wednesday, the Bank of Korea stated that despite increased uncertainties at home and abroad, the country's financial system overall remained stable with strong support from enhanced economic growth, resilient financial institutions, and robust external payment conditions. However, the report warned that as housing prices in Seoul and surrounding areas accelerate and investors increasingly rely on leverage to purchase assets, financial imbalances may further accumulate. The central bank also pointed out that while banks and other financial institutions maintain capital and liquidity buffers, credit risks for vulnerable borrowers and businesses are rising. The report stated: "Since the second half of 2025, the Bank of Korea has kept its policy rate at 2.5%, but considering inflation pressures, economic conditions, and financial stability risks, it deems it necessary to raise the policy rate at the appropriate time." Hwang Kunil, a member of the Monetary Policy Committee responsible for the report, warned that the growing polarization in the economy could become the root cause of financial instability. In a separate statement, he noted that pressure on vulnerable sectors is increasing, coupled with the resurgence of household debt related to the warming real estate market and leverage investments, all of which require close monitoring. The Bank of Korea stated that it will continue to coordinate monetary policy and macroprudential policy, while strengthening supervision of household debt, leverage investments, and liquidity risks in the non-banking sector. Decision-makers also emphasized the need to remain vigilant against potential spillover effects from global oil prices, interest rates, and currency markets. This report adds to a series of increasingly hawkish signals under the leadership of Governor Lee Ju-yeol. He noted that stronger growth, persistent inflation pressures, exchange rate risks, and steadily rising housing prices are all pointing towards the same policy direction, reducing the usual trade-offs that complicate monetary policy decisions.