Bank of Korea warned there’s a chance of increased volatility following more rate hikes from the Fed, following U.S. Federal Reserve Chair Jay Powell’s speech in 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% Thursday, extending a pause since May, as policymakers continued to flag household debt as a key risk.
The decision was in line with expectations from economists polled by Reuters, and followed the introduction of tighter property measures in Seoul aimed at curbing borrowing.
In a statement released Thursday, the Bank of Korea cited stable inflation and improving economic growth outlook as the main reasons to extend the pause, while flagging that it was monitoring stability in the housing market and household debt.
“Domestic demand is expected to continue its recovery, led by consumption, and exports are likely to remain favorable for some time owing to the strong semiconductor sector, the central bank said.
Still, the BOK warned that uncertainties for the economic growth have increased due to the ongoing trade talks with the U.S., noting that the impacts of U.S. tariffs on exports are likely to “expand gradually.”
The central bank’s Monetary Policy Board said it will “maintain its rate cut stance to mitigate downside risks to economic growth and adjust the timing and pace of any further Base Rate cuts.”
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 debt levels higher.
On Oct. 15, South Korean media reported that stricter property rules, including tighter loan limits, will now apply across all 25 districts of Seoul, as well as 12 more 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 the top of mind for policymakers this year, a critical constraint for additional easing in 2H25.”
They noted that home prices in central Seoul accelerated again in mid-September, despite earlier rounds of cooling measures in June and September.
“With such measures, a sequential decline in home transactions is expected in coming months, but it is still hard to tell if the price increase could be fully contained, in our view,” they said.
The BofA economists, however, penciled in a rate cut by the BOK in November to bolster growth in the economy, particularly if progress is made in trade talks and housing policy.
South Korea’s Kospi index and the small-cap Kosdaq were flat following the announcement. The Korean won weakened 0.19% against the greenback to 1,434.70, its lowest level since May.
The decision came as the central bank treads cautiously to avoid further depreciation of the won, which has weakened by over 4% in the last three months against the greenback, as trade negotiations with the U.S. dragged on.
Stalled trade talks
The rate decision also came as South Korea faces uncertainty over its trade relationship with the U.S., after both sides struggled to finalize details of an agreement reached on July 30.
Under the deal, the Asian nation is set to invest $350 billion in the U.S. in exchange for a lower tariff rate of 15% on its U.S.-bound shipments. South Korean President Lee Jae Myung warned in a Reuters interview that transferring the full amount in cash could trigger a financial crisis reminiscent of 1997.
Tariffs on the country’s auto exports will also be cut to 15%, according to the preliminary agreement.
Negotiators are reportedly due to visit Washington this week to finalize terms ahead of the APEC Summit on Oct. 31 in South Korea.
At its last meeting in August, the BOK raised its 2025 inflation forecast to 2% from its May forecast of 1.9%, while the GDP growth outlook for the year was also revised to 0.9% from 0.8% previously.
Consumer inflation in South Korea climbed 2.1% in September from a year earlier, accelerating from a 1.7% rise in August, with core inflation advancing 2%.
The BOK expects domestic demand to make a “modest recovery,” due to a supplementary budget and improvement in consumer sentiment.
“Exports are likely to show favorable movements for some time, but are likely to gradually slow as the impacts of U.S. tariffs expand,” the central bank said.
