Seoul: South Korea’s central bank maintained its benchmark interest rate at 2.5 percent during its latest policy meeting, aiming to ensure financial stability amidst a weakened local currency and an unstable housing market. This decision marks the fourth consecutive time the Bank of Korea (BOK) has held the rate steady, as it navigates an easing cycle that began last year in an effort to bolster economic growth.
According to Yonhap News Agency, the BOK’s Monetary Policy Board’s decision reflects a careful balance between supporting economic recovery and addressing risks to financial stability. The central bank has previously reduced the key rate by 100 basis points since October last year, moving from 3.5 percent to 2.5 percent to support growth.
The BOK noted in its statement that while inflation has increased, the economy is improving, driven by consumption and exports. However, uncertainty in growth outlooks and financial stability risks persist, prompting the board to maintain the current rate. Governor Rhee Chang-yong emphasized the board’s focus on both potential rate cuts and holding rates steady, with no consideration for rate hikes at this time.
Local experts suggest the BOK’s decision allows for a “wait-and-see” approach, as economic recovery continues. The central bank upgraded its economic growth forecasts for this year and next, projecting growth of 1 percent this year and 1.8 percent next year.
A significant concern for policymakers is the South Korean won’s sharp decline, as a rate cut could lead to capital outflows and further currency depreciation. The won has been trading below the critical 1,450-won per dollar level, influenced by local and offshore investment activities. The finance ministry, BOK, National Pension Service (NPS), and welfare ministry have formed a consultation body to address FX market volatility and investment returns.
Governor Rhee addressed worries about the currency’s depreciation and its potential impact on inflation, while also dismissing fears of a financial crisis akin to past experiences. He highlighted the need for the NPS to adjust its investment strategies and secure profitability through currency hedging.
Additionally, the widening interest rate gap with the United States poses a risk, as it could trigger foreign capital outflows and add pressure on the won. Currently, the policy rate gap between South Korea and the U.S. stands at 1.5 percentage points, with expectations of a rate cut by the Federal Reserve next month.
The BOK is also assessing the government’s recent measures to cool the housing market and manage rising household debt. Despite tighter regulations, apartment prices in Seoul showed a slight increase, indicating persistent challenges in the housing sector.
The central bank’s meeting was its final policy session of the year, as it continues to navigate complex economic and financial conditions.