Trade, housing debt poses stability risks, Bank of Korea warns

South Korea’s central bank warned that risks from US tariffs, prolonged industrial weakness and housing market imbalances could undermine financial stability, highlighting the need to keep macroprudential policies tight.

The Bank of Korea said in its financial stability report Thursday that government stimulus and lowered borrowing costs are expected to ease debt burdens for households and small businesses. Still, it cautioned that such relief could reignite property imbalances, particularly in the capital region where housing prices have rallied.

The bank pointed out that the impact of US President Donald Trump’s tariff policies will intensify in coming months, potentially curbing corporate profits and weakening repayment capacity in vulnerable industries. That could delay improvements in banks’ balance sheets and increase the risk of credit deterioration.

South Korea has managed to strike a deal with the US to bring down across-the-board tariffs to 15%, but levies on cars still remain higher despite the agreement. Questions also remain over the implementation of a $350 billion US investment plan.

The BOK has been cautious about when to resume monetary easing, keeping a close watch on growing household debt and renewed heat in the Seoul-area housing market. After starting its easing cycle last October, the bank has delivered four cuts but opted to keep rates unchanged at its past two policy meetings. The next policy decision will come on October 23.

The report also flagged lingering risks from project-finance loans tied to the construction sector. While restructuring is underway, sluggish regional housing markets and weak construction demand may fuel additional losses, putting pressure on financial institutions to manage liquidity carefully through the end of the year.

Household debt growth has moderated thanks to government measures, but price expectations in Seoul remain strong, the BOK said in a statement, citing monetary policy board member Shin Sung Hwan. He stressed that maintaining a firm macroprudential stance is crucial to prevent imbalances from growing.