BoK holds policy at 2.5% and signals room for further cuts

South Korea’s central bank kept rates unchanged today as expected, though it signalled there would be room for further cuts in the months ahead.

The Bank of Korea’s monetary policy board decided to leave the base rate unchanged at 2.5% for the third meeting in a row today (October 23). In a statement after the decision, the BoK said inflation was stable and growth had continued to improve despite global uncertainties.

One board member voted to reduce the interest rate by 25 basis points at the meeting, while others voted to keep it unchanged. The central bank said its board considered it necessary to continue its “rate cut stance” and make future monetary policy decisions based on incoming data. 

Reuters reported that BoK governor Rhee Chang Yong said that four of the board’s six members were open to reducing interest rates to 2.25% over the next three months, though he added that he was not one of them. Rhee said he and the remaining board member supported maintaining the rate at 2.5%.

The BoK also flagged concerns about the country’s housing market overheating, particularly in the capital, Seoul. “It is judged that monetary policy should also be managed so as not to stimulate expectations for further increases in housing prices,” it said.

The BoK also said exchange rate volatility had increased “sharply” and that its board would pay attention to the possible impacts this could have on South Korea’s financial stability. The won weakened to around 1,435 per dollar today, reaching its lowest level since May.

The central bank said the weakened won could place upward pressure on inflation, though demand side pressures were subdued and global oil prices were stable: “So the overall stable trend is expected to continue.”

The rate stay was predicted by economists at major banks ahead of the decision. Of the 35 economists surveyed by Reuters before the decision, 33 predicted the hold.

ANZ economist Krystal Tan said in an note published after the decision that she now expected the BoK to carry out one more 25bp cut in the current easing cycle instead of two. Tan said financial stability risks, including the housing market and foreign exchange volatility, remained the main barriers to further easing.

“While a cut in November is still possible, a lot needs to go right: clear signs that housing market pressures are stabilising, reduced [won] volatility, and greater clarity on external risks, including the outcome of US-Korea and US-China trade negotiations,” Tan said. She said for this reason, ANZ predicted that the BoK’s next cut would come in the first quarter of next year.

ING economist Min Joo Kang also predicted the BoK would resume rate cuts in Q1. “By that time, uncertainties related to US tariffs may be resolved, the [US] Federal Reserve may have implemented additional rate cuts, and [South Korea’s] housing market may show signs of stabilisation,” she said in a note.

MUFG currency analyst Micheal Wan said in a note published before the BoK’s decision that the won had been weighed down partially by a lack of clarity around a potential investment pledge from South Korea to the US, and a weaker yen.

South Korea had been expected to pledge $350 billion in investment to the US as part of ongoing trade negotiations between both sides. However, according to a report published by South Korean media today that cited US sources, the two sides were now negotiating a phased $200 billion investment that would be deployed over eight years.

Korean finance minister Koo Yun Cheol told Bloomberg TV yesterday that US officials were aware that an “upfront” deployment of funds could cause a shock to South Korea’s foreign exchange market. Koo said it was unclear whether a currency swap would be needed for the deal.

Speaking at the South Korean parliament yesterday, BoK governor Rhee said that the central bank had not reviewed any currency swap agreements with the US in relation to the deal. Rhee said South Korea could provide up to $20 billion per year for any such deal and that the country’s trade representatives in Washington DC were negotiating accordingly.