Financial stability: A dealer stands near screens displaying the Kospi. The foreign exchange inflation has remained broadly in line with the central bank’s projections. — AP
SEOUL: South Korea’s central bank left its benchmark interest rate unchanged in a widely expected move while cutting a reference to a potential rate cut from its statement, nudging toward a neutral stance as authorities monitor the weakening won along with risks of financial imbalances.
The Bank of Korea (BoK) held its seven-day repurchase rate at 2.5% for a fifth straight meeting yesterday.
The decision matched expectations from all 21 economists surveyed by Bloomberg.
The move extends a pause that began in July after four rate cuts since October 2024.
“Along with inflation expected to stabilise gradually, economic growth continues to improve and risks to financial stability also remain,” the bank said in a statement.
“Therefore, the board will make its policy decisions, amid supporting a recovery in economic growth, while closely monitoring changes in domestic and external policy conditions.”
Previously the board had said it would decide “whether and when to implement any further base rate cuts.” That wording is no longer in the statement.
“The BoK appears to be moving faster than many had expected, likely choosing to shut the door on rate-cut expectations amid growing exchange-rate pressures,” said Jeong-Woo Park, an economist at Nomura Holdings.
“That indicates the central bank was under significant strain from the currency.”
The decision to hold comes after the economy showed signs of resilience even with the outlook for global trade somewhat cloudy due to protectionist trade policies.
In November, the BoK raised its 2026 growth forecast to 1.8%, citing strong exports and a gradual recovery in private consumption, while also nudging up its inflation outlook to 2.1%.
Yesterday’s meeting follows the board’s move toward a more neutral posture in November, when it removed a reference in its statement on maintaining a rate-cut stance. Governor Rhee Chang Yong said at the time that officials were evenly split on whether a rate cut could come within three months or whether the bank would need to stand pat over that period.
He said the policy rate is already near a level deemed neither restrictive nor stimulative.
While policymakers have kept one eye on supporting the economy, they’ve focused more attention of late on guarding against renewed financial market instability tied to the housing market and the foundering currency.
The won has been Asia’s weakest performing currency this year, raising risks of faster inflation via more costly imports.
Treasury secretary Scott Bessent highlighted the moves in a meeting with South Korea’s Finance Minister Koo Yun Cheol in Washington.
“Their discussion addressed the recent depreciation of the South Korean won, which the secretary noted was not in line with South Korea’s strong economic fundamentals,” the Treasury said in a statement released overnight.
Bessent “emphasised that excess volatility in the foreign exchange market is undesirable.”
Meantime the housing market rally has persisted despite a series of government measures meant to cool demand, and mortgage debt levels continue to increase.
Apartment prices in Seoul have advanced for 49 consecutive weeks, according to the latest figures.
Economist Hyosung Kwon said growth is firming as artifial intelligence-driven global chip demand offsets the drag from higher US tariffs.
“At the same time, a weaker won and rising Seoul house prices keep inflation and financial-stability risks elevated.
“Our base case is an extended pause, with the policy rate anchored at 2.5% through year-end.”
Growth in total household credit in the July to September quarter slowed to 0.8%, while the outstanding balance reached a record high.
The pace of gains in the previous quarter was the fastest since 2021.
Inflation has remained broadly in line with the central bank’s projections, theoretically giving the BoK room to maneuver, but policymakers have warned that the weakening currency could pose upside risks to prices.
In the government’s strategy growth policy for this year, it struck a slightly more optimistic tone than the central bank, forecasting 2% growth, although it cautioned that without structural reforms the country’s potential growth rate could slip toward 1% in the 2030s and near zero thereafter.
While semiconductors are set to lead growth, Rhee has cautioned that momentum outside the tech sector remains weak with non-IT growth running well below the headline pace, a divergence that has complicated the policy outlook.
Rhee is scheduled to brief reporters later yesterday, when he is expected to elaborate on the board’s policy outlook and disclose whether there were any dissenting votes.
Markets will watch whether officials preserve language signalling scope for further easing or continue the shift toward neutral by emphasising financial stability risks. — Bloomberg
