South Korea's financial system remains relatively stable, but rising household debt and home prices may increase potential financial instability, a central bank report showed.

In its report on financial stability, the Bank of Korea said there are high expectations about monetary easing as household debts and home prices do not show signs of drastically slowing down.

The central bank warned of high chances of financial imbalance growing due to a rise in home prices and household debts.

The already-announced home supply plan, coupled with steps to curb a rise in household debt, may partly curb any potential financial imbalance, "but there will be more difficulty in managing household debts if home prices continue to rise," the central bank said.

Against this backdrop, the central bank said the authorities need to continue their efforts to manage household debt based on borrowers' debt repayment capability.

The BOK also said financial institutions need to strengthen their asset soundness by sorting out more bad loans.

The central bank said authorities need to take timely measures against increased volatility in the financial market, while beefing up the monitoring of various factors, such as the US presidential election, geopolitical risks, and property-related loans.

Household loans continued to grow despite high borrowing costs.

Household loans extended by banks in South Korea rose for a fifth straight month in August, led by a record increase in mortgages, according to central bank data.

Banks' household loans rose by 9.3 trillion won ($6.9 billion) in August from a month earlier, marking a sharp acceleration from a 5.5 trillion-won gain in July and the highest on-month increase in 37 months.

Banks' home-backed loans added 8.2 trillion won from a month earlier to 890.6 trillion won in August, marking the highest on-month increase in the country's history.

Last month, the bank held its key interest rate steady at 3.5 percent for the 13th straight time amid moderating inflation and high household debts, and some expect the BOK to start cutting the rate either in October or November.

The rate freeze comes after the BOK delivered seven consecutive rate hikes from April 2022 to January 2023. (Yonhap)