Recently, headlines in South Korea have been buzzing with phrases like “No rate cuts” or even “Rate hikes are still on the table.” Naturally, many people wonder, “Is the housing market going to crash?”
But if you’re looking at this like everyone else, you’re missing the bigger picture. To really understand what’s happening with interest rates and the real estate market, you need to grasp a key concept: money supply, especially total money supply (M2).
In this post, we’ll break down the relationship between interest rates, money supply, and how these factors affect inflation and housing prices.
1. What Does “No Rate Cut” Actually Signal?
1) The Reality of Rate Freezes or Hikes
When central banks decide not to cut rates—or even hint at raising them—it’s because they see the need to keep liquidity in check.
Rising inflation or risks of economic imbalance often lead to tighter monetary policies.
This means central banks are playing defense, trying to control how much money is circulating in the economy.
2) A Sign of Rapid Money Supply Growth
A statement like “no rate cut” can also indicate that money supply is already expanding rapidly.
- During the COVID-19 pandemic, governments around the world flooded the markets with cash.
- Now, that money is starting to ripple through the economy, creating what economists call the money multiplier effect.
2. Base Money vs. Total Money Supply: Key Concepts
1) What Is Base Money (M0)?
Base money is the cash issued directly by the central bank (physical cash plus reserves held by commercial banks).
For example, if the Bank of Korea issues $10 billion, that $10 billion is considered base money.
2) What Is Total Money Supply (M2)?
Total money supply includes base money but also all the credit and financial products created by banks.
It’s what drives inflation and asset prices, including housing costs.
3. The Money Multiplier Effect: How It Works
1) Reserve Ratios and Credit Creation
Commercial banks are required to hold a portion of their deposits as reserves.
In South Korea, the current reserve requirement is 7%.
This means if banks have $100 billion in base money, they must hold $7 billion in reserves, leaving $93 billion available for loans.
2) Endless Lending Cycles
The $93 billion in loans re-enters the economy, eventually returning to banks as deposits.
From there, 7% is held back as reserves, and the remaining $86.5 billion is loaned out again.
This process theoretically continues indefinitely, growing the total money supply exponentially.
3) A Theoretical 14x Increase
Using simple math, 1 / reserve ratio (1/0.07 = ~14) shows that total money supply can grow up to 14 times the original base money.
In practice, however, factors like economic conditions and lending demand slow this process.
4. Real-World Limits on the Money Multiplier Effect
1) Economic Cycles
During economic booms, money circulates faster, amplifying the multiplier effect.
In downturns, lending slows, and money doesn’t flow as freely, which limits the effect.
2) Policy and Regulation
Strict lending policies or tighter credit controls can cap how much money banks can lend, further dampening the multiplier effect.
5. Why Interest Rates Are the Key
1) How Interest Rates Impact Money Supply
When interest rates go up, borrowing becomes more expensive, which slows down lending and money supply growth.
Conversely, lower rates encourage borrowing, accelerating the money multiplier effect.
2) The Federal Reserve (Fed) and the Bank of Korea’s Approach
The U.S. Federal Reserve’s aggressive rate hikes were aimed at curbing inflation by controlling the explosion in money supply.
Similarly, the Bank of Korea has kept rates steady or raised them to manage liquidity and prevent asset bubbles.
6. The Link Between Money Supply and Housing Prices
1) It’s Not as Simple as It Looks
A 50% increase in money supply doesn’t necessarily mean housing prices will rise by exactly 50%.
The total money supply, not just base money, determines inflation and asset prices.
2) Long-Term Outlook
Over the next 5–10 years, we could see a massive increase in total money supply due to the lingering effects of COVID-era liquidity injections.
This, combined with future government policies, could significantly influence housing prices and inflation trends.
7. Key Takeaways
- Headlines like “No rate cut” aren’t just about interest rates. They reflect deeper concerns about inflation and the long-term effects of past monetary expansion.
- While the money multiplier effect is gradual, its impact on asset prices, including housing, can be dramatic over time.
- Investors and homeowners should keep a close eye on interest rate trends and total money supply metrics to make informed decisions.