South Korea Maintains Interest Rates as Inflation and FX Concerns Mount

The Bank of Korea (BOK) has decided to keep interest rates steady for the fourth consecutive time, suggesting that the current cycle of rate cuts may be winding down. Announced on Thursday, the benchmark interest rate remains at 2.50%, aligning with market anticipations.

In its latest assessment, the BOK has revised its economic forecast upwards, projecting growth and inflation rates for 2025 at 1.0% and 2.1% respectively. Notably, the bank has eliminated previous wording that implied a continued focus on rate cuts, stating instead that, “a decision will be made on any further Base Rate reductions.” This change reflects a cautious stance as concerns about the declining Korean won intensify.

Governor Rhee Chang-yong expressed worries about the currency's depreciation, suggesting it may lead to increased costs. “While businesses oriented towards domestic demand might struggle, the overall economic repercussions remain uncertain,” he remarked.

South Korea finds itself grappling with multifaceted risks; while domestic spending has increased, the weakened currency poses challenges for stimulating growth without triggering inflation. Experts predict the next possible rate cut to occur in early 2026, postponing any action this year. Some officials express caution about further easing due to rising property prices in Seoul and concerns about financial stability.

Ahn Jae-kyun, an expert from Korea Investment Securities, stated, “While it isn’t entirely off the table to consider future easing, the likelihood appears minimal. Rates are anticipated to be stable for now.” He cautioned that contemplating rate hikes might be premature given the potential for an economic downturn in early next year.

The Korean won has experienced a significant drop this quarter, losing nearly 4% against the US dollar and standing as the second-worst performer in Asia, following the Japanese yen. The government is in discussions with key financial stakeholders, including the National Pension Service and exporters, to find solutions for stabilizing the dollar-won exchange, although no definitive measures have been introduced.

Looking towards the future, the BOK anticipates South Korea’s economy to grow by 1.8% in 2026, maintaining a headline inflation rate of 2.1%, which underscores the delicate equilibrium the central bank seeks to uphold between encouraging growth and controlling inflation.