The Bank of Korea has reaffirmed its shift towards a more hawkish policy stance, indicating that interest rates need to be raised at an appropriate time due to risks from rising home prices, increasing household debt, and leveraged investments.

In its semi-annual Financial Stability Report released on Wednesday, the central bank stated that the country's financial system remains broadly stable, supported by stronger economic growth, resilient financial institutions, and a solid external position, despite heightened domestic and global uncertainties.

However, the report cautioned that financial imbalances could worsen, driven by accelerating house price gains in Seoul and surrounding areas and a growing reliance on leverage among investors. It also noted that credit risks for vulnerable borrowers and firms are on the rise, even as banks and other financial institutions maintain capital and liquidity buffers.

The report stated that while the central bank has held its benchmark rate at 2.5% since the latter half of 2025, it sees a need to raise the policy rate at an appropriate time, taking into account inflation pressures, economic conditions, and financial stability risks.

Monetary Policy Board member Hwang Kun-il, who led the report's preparation, warned that increasing polarization within the economy could become a source of financial instability. In a separate statement, he highlighted that mounting stress in vulnerable sectors, coupled with a renewed surge in household debt linked to the real estate market and leveraged investments, warrants close monitoring.

The Bank of Korea said it will continue to coordinate monetary and macroprudential policies while strengthening supervision over household debt, leveraged investments, and liquidity risks in the non-banking sector. Policymakers added that authorities should closely monitor potential spillover effects from global oil prices, interest rates, and foreign exchange markets.

This report further substantiates a series of increasingly hawkish signals from the central bank under Governor Shin Hyun-song's leadership. He has previously indicated that stronger economic growth, persistent inflation pressures, foreign exchange risks, and rising home prices are increasingly pointing to the same policy direction, thereby reducing the trade-offs that typically complicate monetary policy decisions.