Korea’s Triple Dilemma: A Monetary Policy Trapped Between a Real Estate Bubble and Trade War

Introduction: A Policy Authority’s Dilemma

The Bank of Korea froze the base interest rate at 2.5% on Thursday, July 10. This decision is not merely a monetary policy judgment—it is a microcosm of the complex crisis currently facing the Korean economy. Amid escalating global trade wars and an overheating real estate market in Seoul, policymakers are trapped in an unprecedented dilemma.

According to a recent report from the Financial Times, Korean policymakers want to cut interest rates to stimulate the economy but are concerned that doing so will further inflate real estate prices in prime areas like Gangnam, Seoul. This highlights a fundamental structural contradiction within the Korean economy.

U.S. Rate Policy and Korea’s Monetary Policy Dilemma

The Fed’s Easing and Korea’s Limited Options

While the U.S. Federal Reserve is maintaining a gradual rate-cutting stance despite inflation concerns, Korea faces tighter constraints. Normally, U.S. rate cuts would give emerging markets room to ease, but Korea's internal limitations weigh more heavily. According to Park Jong-hoon, head of research at Standard Chartered Korea, “The Bank of Korea wants to cut rates to stimulate the economy, but is concerned that lower rates would fuel a bubble in the real estate market and threaten financial stability.”

KRW-USD Exchange Rate Outlook: A Collision of Factors

The won-dollar exchange rate is currently being influenced by several conflicting factors:

Upward pressures:

• Trump administration’s tariff threats and worsening trade tensions

• Korea’s slowing economic growth (negative growth in Q1)

• Weakened export competitiveness

Downward pressures:

• The Fed’s rate-cutting stance

• Potential foreign investment inflows

The exchange rate is expected to fluctuate between 1,350 and 1,400 KRW over the next six months, with the details of the Trump administration’s tariff policy likely to be a key variable.

Trump’s Tariffs and the Future of Korean Exports

The Impact of a 25% Tariff

President Trump has once again threatened to impose a 25% tariff on Korean exports if a trade deal is not reached by August 1. Korea’s key export sectors are at risk of a direct hit.

Industries most at risk:

• Automobiles: Hyundai/Kia’s U.S. export competitiveness would drop sharply

• Steel: Already under restrictions, could face further impact

• Electronics: Home appliances from Samsung and LG could see declining exports

With manufacturing activity having contracted for five consecutive months as of June, additional tariffs could deal a fatal blow to the Korean economy.

Intensified Competition from China

At the same time, Korea is facing intensified price competition from low-cost Chinese exporters. This creates a dual pressure on exports, tariffs in high-value markets like the U.S., and price competition in mid- to low-end markets from China.

Outlook for Korean Economic Recovery

Short-Term Outlook: Recession to Persist Through First Half of 2025

The OECD recently forecast Korea’s potential growth rate to fall below 2% in 2025 for the first time since 2001. This suggests structural issues cannot be resolved in the short term.

Key hurdles to recovery:

• Sluggish productivity growth

• Labor force decline due to population aging

• Deteriorating global trade environment

• High household debt (92% of GDP—highest among developed nations)

Mid-to-Long Term Outlook: Structural Reform Is Key

President Lee Jae-myung’s ₩23 trillion fiscal stimulus (including direct payments of $110–$410) may provide short-term relief, but it is not a fundamental solution.

For real recovery, Korea needs:

• Increased innovation investment to boost productivity

• Labor market reform in response to demographic change

• Real estate market stabilization to improve resource allocation

Seoul Real Estate Market: Can It Be Tamed?

Persistent Price Increases in Gangnam

Real estate prices in premium districts like Gangnam, Seoul, recently recorded their highest weekly growth rate in nearly seven years, comparable to the 2018 housing boom. Bank of Korea data shows that household mortgage lending increased by $4.5 billion in June, the largest jump in nine months, with monthly growth above 4% for four consecutive months.

Policy Limitations

To cool the market, the Lee Jae-myung administration has introduced:

• ₩600 million mortgage cap

• Tighter lending regulations

• Declared war on speculators

Yet Standard Chartered’s Park Jong-hoon warns, “As long as Koreans believe real estate is safer than stocks, profits from the stock market will eventually flow back into real estate.”

The Real Problem Is Supply

Myongji University political science professor Shin Yul noted, “Suppressing demand alone won’t stabilize the real estate market. Supply must be expanded.” Chronic undersupply in Seoul is the root issue.

Stock Market Rally: The Pros and Cons of KOSPI 3,000

Surprising Performance in H1

Korea’s stock market has seen a surprising rebound in 2025. The KOSPI closed at 3,021.84 on June 20, topping 3,000 points for the first time in 3.5 years and has since climbed to around 3,160. The index surged 27% in the first half of the year, marking the strongest first half since the dot-com boom in 1999.

Optimism surged after the Lee Jae-myung administration came to power. President Lee commented that the 12.96% stock market gain since his inauguration “reflects the public’s expectation of the new administration.”

Risks Behind the Rally

However, red flags are appearing:

• Retail investor deposits surged to ₩64.9 trillion, the highest in 37 months

• Margin loans reached ₩19.2 trillion the highest in 10 months

• Retail investors sold a net ₩584.8 billion while foreign and institutional investors bought

Daishin Securities strategist Lee Kyung-min warned, “With trading volume falling, buying momentum is weakening. This rally appears to be driven more by sentiment than fundamentals, and could stall near the 3,000 level.”

Questions About Sustainability

There are growing concerns about whether this rally is sustainable. As Nomura economist Park Jung-woo pointed out, the shift of funds from real estate to stocks could be temporary. Koreans’ preference for real estate remains strong.

Conclusion: The Difficulty of Finding Balance

Korea’s economy is currently caught in an unprecedented policy dilemma. Stimulating growth requires rate cuts, but those could further overheat an already inflated housing market. Simultaneously, Trump’s tariff threats are forcing a fundamental reevaluation of Korea’s export-driven growth model.

Policy direction should include:

• Selective interest rate policy: Differentiating mortgage and regular loan rates

• Accelerating structural reforms: Boosting productivity and innovation

• Expanding real estate supply: Easing housing shortages in Seoul

• Diversifying exports: Reducing U.S. dependence and developing new markets

A true recovery for the Korean economy will only be possible once these structural challenges are addressed. Despite the stock market rally, a meaningful real economy rebound likely won’t happen until the second half of 2025.

While KOSPI breaking through 3,000 is a positive signal, it doesn’t equate to real economic recovery. In fact, the current stock market surge could form a new asset bubble, much like real estate—warranting a cautious approach.