Korea housing inflation concerns outweigh easing inflation, BOK stance likely to remain hawkish

Overview

This report discusses a shift in the drivers of Korean monetary policy: inflation pressures are easing as oil prices decline, but rising real estate prices, especially persistent increases in Seoul apartment prices, are making financial stability a more important policy constraint for the BOK.

Core views

The core view is that inflation factors alone are no longer sufficient to justify front-loaded consecutive rate hikes, but financial stability concerns stemming from rising housing prices are intensifying. Nomura therefore maintains its forecast for the BOK to hike by 25bp each in July, October, and January next year, while arguing that hikes after July will proceed at a more measured pace.

Analysis framework

The report assesses the policy path by comparing two macro signals: first, the downward impact of falling Brent oil prices on Korea's inflation outlook; second, the upward pressure on financial stability from continued rapid increases in Seoul apartment prices. The policy focus is shifting from a pure inflation constraint toward trade-offs among inflation, financial stability, and domestic demand.

Methodology notes

• MacroeconomicsMonetary Policy Reaction Function

  Trade-off between inflation pressures and financial stability

  The report evaluates in parallel the downside inflation risk from falling oil prices and the financial stability risk from rising housing prices to judge whether the BOK still needs to continue hiking rates.

• Real Estate CycleHousing Price Momentum Monitoring

  Annualized increase in Seoul apartment prices

  The report uses the weekly annualized increase in Seoul apartment prices and the number of consecutive rising weeks to measure housing market pressure, treating them as an important proxy for financial stability risk.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Korean policy rate expectations

  Directly related

  Strengths

  Rising housing prices strengthen financial stability constraints, supporting the BOK in maintaining a hawkish stance.

  Weaknesses

  Easing inflation pressures and only gradual improvement in domestic demand reduce the need for consecutive rapid hikes.

  Comparison

  Compared with energy inflation, housing and financial stability factors are gaining greater weight in policy assessments.

  Risks

  If housing prices cool or inflation falls more than expected, rate-hike expectations may be revised down.

• Korean real estate market

  Policy driver

  Strengths

  Continued rapid increases in Seoul apartment prices reinforce the influence of real estate on macro policy.

  Weaknesses

  High home prices and potential regulatory responses may suppress subsequent demand.

  Comparison

  At present, real estate price pressures explain the BOK's hawkish tilt better than oil-driven inflation pressures do.

  Risks

  Policy tightening, changes in credit conditions, or weaker home-buying demand could slow price momentum.

• Brent crude and Korean inflation

  Inflation input variable

  Strengths

  Falling oil prices help ease inflation pressures in Korea.

  Weaknesses

  If oil prices rise sharply again, the inflation-driven case for rate hikes could strengthen once more.

  Comparison

  The current decline in oil prices weakens the inflation pillar, but does not offset concerns over housing-related financial stability.

  Risks

  Geopolitical conflict or supply disruptions could trigger an oil price rebound.

Key data

• Brent oil price in the BOK's inflation assumptionabout USD95/bblThe report says the BOK's latest forecast assumes an average Brent price of about USD95/bbl, and current oil price declines are creating downside risk to the inflation forecast.
• Increase in Seoul apartment prices15.8% annualizedSeoul apartment prices rose at an annualized pace of 15.8% in the last week of June.
• Consecutive weeks of strength in Seoul apartment prices8 weeksThe report states that Seoul apartment prices have posted double-digit annualized gains for an eighth consecutive week.
• Expected rate-hike path25bp each in July and October 2026 and January 2027Nomura maintains this rate-hike forecast.
• Expected terminal rate3.25%The report's forecast for the BOK policy rate endpoint.
• Research analystJeong Woo Park - NSLThe analyst listed on the report cover page.

Impact & implications

For markets, expectations for Korean policy rates may no longer be driven primarily by upside inflation risks, but more by real estate prices and financial stability pressures. If housing prices remain strong, the BOK may maintain hawkish signals even in the face of slowing inflation; if oil prices stay low and housing momentum cools, the pace of subsequent hikes may slow more easily.

Risks

• If oil prices rise sharply again, the downside risk to the BOK's inflation forecast could reverse.
• If Seoul housing prices cool rapidly, the support from financial stability concerns for rate hikes could weaken.
• If Korean domestic demand is weaker than expected, the BOK may proceed more cautiously with subsequent hikes.
• If the BOK places less weight on financial stability risks than the report assumes, the actual policy path could be more dovish than Nomura forecasts.
• High-frequency volatility in real estate, inflation, and oil price data could change market views on the pace of hikes after July.

What to watch

• Whether the BOK Monetary Policy Board meeting in July delivers a 25bp hike.
• Whether Brent oil prices remain near pre-conflict levels or rise sharply again.
• Whether the weekly annualized increase in Seoul apartment prices continues to stay in double digits.
• Whether Korean inflation data and the BOK's subsequent inflation forecasts are revised downward.
• Whether the pace of improvement in Korean domestic demand is sufficient to absorb further rate hikes.