South Korea keeps rates on hold but surprises with nod to further cuts

[SEOUL] South Korea’s central bank kept policy interest rates unchanged on Thursday (Oct 23), wary of worsening an overheating housing market and a declining currency, but left the door open for another cut, pushing the won down even further against the US dollar.

At its policy meeting, the Bank of Korea (BOK) voted to keep its benchmark interest rate unchanged at 2.5 per cent, as polled by Reuters.

However, governor Rhee Chang-yong said a majority of the bank’s board members remained open to another rate cut in the next three months.

“Looking ahead for the next three months, four of the six board members, myself excluded, are open to taking interest rates to 2.25 per cent or lower while two see the interest rate of 2.5 per cent level to be maintained,” Rhee said at a news conference.

The BOK’s surprisingly dovish tone pushed the benchmark Kospi to a fresh record high, putting it up 62 per cent so far this year, but dragged the won to about a six-month low.

The median expectation is now for one more cut in November and then a prolonged pause, as analysts expect policymakers to put more emphasis on managing risks related to financial stability amid an overheating housing market and uncertainty over a US trade deal.

“The Board 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 while closely monitoring changes in domestic and external policy conditions and examining the resulting impact on inflation and financial stability,” the BOK said.

South Korean policymakers have been taking a tactical approach to supporting an economy hit by former President Yoon Suk-yeol’s martial law decree and trade uncertainties. Since October 2024, the BOK has cut interest rates a cumulative 100 basis points.

Yet the potential for renewed home price upswings is problematic for any further easing, particularly as the won, faces downward pressure against the US dollar, analysts say.

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“Market participants had been expecting a unanimous hold today because of (the Governors’) recent emphasis on financial stability,” said Paik Yoon-min, an analyst at Kyobo Securities in Seoul.

“But the presence of one dissenter and those seeing further rate cuts in the forward guidance part made things a bit cloudy.”

South Korea is projected to post the slowest economic growth this year since 2020, when the economy contracted by 0.7 per cent amid the pandemic, as “the impacts of US tariffs on exports are likely to expand gradually,” the bank said.

The construction industry, traditionally a driver of economic growth, is in a downturn due to rising costs of labour and equipment, leading to a shortage of new housing supply in Seoul.

While that has pushed home prices higher, it has also slowed economic activity.

The Lee Jae-myung government announced its third property market curbs in just four months this month as the price-to-income ratio of an apartment in Seoul exceeded both London and Sydney. REUTERS