South Korea Interest Rate

The Bank of Korea (BoK) lowered its base rate by 25 bps to 2.75% at the February 2025 meeting, after keeping the rate unchanged in January. This marked the third reduction in four months, aligning with market expectations. The decision brought borrowing costs to their lowest level since September 2022, amid the continued stabilization of inflation, easing household debt, and weak economic growth. Additionally, the central bank revised its growth forecast for this year to 1.5%, down from 1.9% in the November forecast, due to the impact of US tariff policy changes, domestic political situations, and the government’s economic stimulus measures. Meanwhile, policymakers held their inflation forecast steady at 1.9% for both this year and next and the core inflation rate is expected to be 1.8%, slightly below the previous forecast of 1.9%. In January, annual inflation accelerated to 2.2% but remained close to the BoK's medium-term target of 2%.

The Bank of Korea (BoK) unexpectedly kept its key interest rate at 3% during its January 2025 meeting, defying market expectations of a 25 bps cut. This decision came amid a weak won, which has been depreciating due to the global strength of the dollar, as well as political instability in the country, driving the currency to its lowest level in 15 years. Policymakers noted that while inflation has stabilized and household debt is slowing, downside risks to economic growth have risen. Evidence of this includes a slowing recovery in consumption, sluggish construction investment, and a weakening labor market. The GDP growth outlook is expected to fall below the November forecasts of 2.2% for last year and 1.9% for this year. Meanwhile, inflation remains stable and is expected to persist, but elevated exchange rates could exert upward pressure.

The Bank of Korea (BoK) said it will lower further interest rates next year to ease downward pressure on economic growth. However, the pace of these reductions will depend on their effects on financial stability and the evolving domestic and global risk factors. In its "2025 Monetary and Credit Policy Direction,", released December 25, the central bank noted that while the annual inflation rate is expected to hold a stable trend, downside risks to the economy have heightened due to rising political uncertainty, intensifying overseas competition in key industries, and changes in global trade. Regarding financial stability, the BoK plans to improve early warning functions and promptly launch market stabilization measures as needed. On the forex side, it will address excessive volatility with more stabilization measures, ensure adequate foreign currency liquidity, and consider relaxing foreign exchange soundness regulations in collaboration with the government.