The Bank of Korea warned there was a risk of increased volatility following further rate hikes from the Fed, following US Federal Reserve Chairman Jay Powell’s speech at Jackson Hole. Photographer: SeongJoon Cho/Bloomberg via Getty Images
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South Korea’s central bank kept its benchmark interest rate unchanged at 2.5% on Thursday, extending a pause since May, as policymakers continued to flag household debt as a major risk.
The move was in line with the expectations of economists polled by Reuters and followed the introduction of stricter real estate measures in Seoul aimed at reducing borrowing.
In a statement on Thursday, the Bank of Korea cited stable inflation and improving economic growth prospects as the main reasons for extending the pause, while stressing that it was monitoring the stability of the real estate market and household debt.
“Domestic demand is expected to continue its recovery, led by consumption, and exports are expected to remain favorable for some time due to the strength of the semiconductor sector,” the central bank said.
The BOK nevertheless warned that uncertainties over economic growth have increased due to ongoing trade negotiations with the United States, noting that the impacts of US tariffs on exports are likely to “gradually expand.”
The central bank’s Monetary Policy Council said it would “maintain its rate reduction policy to mitigate downside risks to economic growth and adjust the timing and pace of any further reduction in the base rate.”
Household debt also remained a major concern for the BOK, which has been reluctant to cut rates for fear of fueling housing demand and pushing up debt levels.
On October 15, South Korean media reported that stricter property rules, including stricter lending limits, would now apply in all 25 districts of Seoul, as well as 12 other areas in the surrounding Gyeonggi province.
Previously, the tightened rules only applied to four of Seoul’s 25 districts.
Bank of America analysts wrote in an Oct. 20 note that “housing inflation in Seoul has been top of mind for policymakers this year, a critical constraint for further easing in 2H25.”
They noted that real estate prices in central Seoul accelerated again in mid-September, despite previous rounds of cooling measures in June and September.
“With such measures, a sequential decline in real estate transactions is expected in the coming months, but it is still difficult to say whether the price rise can be fully contained, in our opinion,” they said.
BofA economists, however, expect the BOK to cut rates in November to support growth in the economy, particularly if progress is made in trade negotiations and housing policy.
South Korea’s Kospi Index and the small-cap Kosdaq remained stable after the announcement. The Korean won lost 0.19% against the greenback to 1,434.70, its lowest level since May.
The move comes as the central bank moves cautiously to avoid further depreciation of the won, which has weakened more than 4% over the past three months against the greenback as trade talks with the United States drag on.
Trade negotiations at a standstill
The rate decision also comes as South Korea faces uncertainty over its trade relationship with the United States, after the two sides struggled to finalize details of a July 30 deal.
Under the deal, the Asian nation would invest $350 billion in the United States in exchange for a 15 percent lower tariff rate on its U.S.-bound shipments. South Korean President Lee Jae Myung warned in an interview with Reuters that transferring the entire amount in cash could trigger a financial crisis reminiscent of 1997.
Customs duties on the country’s auto exports will also be reduced to 15 percent, according to the preliminary agreement.
Negotiators are expected to travel to Washington this week to finalize terms before the Oct. 31 APEC summit in South Korea.
At its last meeting in August, the BOK raised its inflation forecast for 2025 to 2%, from 1.9% in May, while the GDP growth outlook for the year was also revised to 0.9%, from 0.8% previously.
South Korea’s consumer inflation rose 2.1 percent in September from a year earlier, an acceleration from a 1.7 percent rise in August, while core inflation rose 2 percent.
The BOK expects domestic demand to see a “modest recovery”, thanks to additional budget and improving consumer confidence.
“Exports are expected to see favorable developments for some time, but are expected to gradually slow down as the impacts of US tariffs become more pronounced,” the central bank said.
