February 3, 2020 / 11:00 PM / 21 days ago

RPT-S. Korean mission to cool home prices puts central bank in quandary

(Repeats with no changes to text)

By Cynthia Kim

SEOUL, Feb 3 (Reuters) - Supporting their president’s efforts to rein in runaway home prices in affluent parts of Seoul was a priority for a majority of South Korea’s central bank policymakers last month when they voted to keep interest rates unchanged, sources familiar with their thinking said.

For the two disappointed board members who voted for a cut at the Jan. 17 meeting, the main considerations should have been supporting an economy growing at its slowest rate in a decade, and lifting inflation off a record low of 0.4%, sources say.

After cuts in July and October, the central bank’s benchmark rate currently stands at 1.25%.

The easy money policy has been blamed for propelling household debt to all-time highs and fuelling investment in high end property, but the export-reliant economy needs help.

It suffered a contraction in shipments for a 14th straight month in January, and the coronavirus epidemic in neighbouring China spells more trouble ahead.

The minutes from last month’s meeting will be released on Tuesday.

“The biggest point of contention is still with view over property market,” one of the sources told Reuters.

Any further easing by the central bank could have left President Moon Jae-in fighting an “uphill battle” to cool property prices, the source added.

When the central bank board next meets on Feb. 27, the chill running through the global economy from coronavirus epidemic should cause more shivers in the Bank of Korea, as China is easily South Korea’s biggest trading partner.

But whether it would be enough to tip the bank’s 7-member board in favour of reducing rates remained uncertain.

“It is simply too early to tell,” said another source.

The two leading doves on the board — Shin In-seok and Cho Dong-chul — believe interest rates that effect the broader economy are inappropriate tools for cooling prices in pockets of Seoul, two other sources said.

A survey in-mid-January by Reuters showed 14 of 33 analysts expecting one more cut during 2020, while 15 saw no change, but that was before the scare over the Wuhan virus took hold.

Back then, Moon vowed to implement “endless” policy measures to cool prices in some overheated districts of the capital. On the same day, his chief policy advisor Kim Sang-jo said his team’s “primary goal is to stabilize prices in Gangnam”, referring to one of the most-affluent neighborhoods.

Since winning a presidential election in 2017, Moon’s administration has taken more than a dozen steps to douse the market, including an outright ban on mortgage lending for high-priced homes and the imposition of a tougher loan-screening process.

Yet, the median price for an apartment in smart parts of Seoul has surged by 50% since Moon took office, according to data from KB Bank.

Taming the property market is a big deal for Moon politically, as there is a parliamentary election on April 15. His Democratic Party currently holds just 129 of the 300 seats, and Moon needs voters to give his party a majority which will improve the chances of his legislative agenda during the last two years of his present term. ($1 = 1,167.2000 won) (Editing by Simon Cameron-Moore)

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