Tariff deal may lead BOK to keep rate steady through year-end

Bank of Korea (BOK) headquarters in Seoul / Courtesy of BOK

Bank of Korea (BOK) is likely to hold its key rate unchanged next month, aided in part by the recent breakthrough in Korea-U.S. tariff negotiations and the U.S. Federal Reserve’s back-to-back rate cuts, market watchers said Friday.

The rate differentials with the U.S. have narrowed, reducing fears of foreign capital outflow and a weaker Korean currency against the U.S. dollar.

Aside from external conditions, the central bank is expected to focus more on the overheating property market, given the rise in Seoul apartment prices and consumer expectations of further price increases over the coming year.

Also under consideration is the country’s better-than-expected July-September GDP of 1.2 percent, raising hopes that this year’s figure will come in at 1 percent or higher, better than the forecast of 0.9 percent made in August.

BOK Governor Rhee Chang-yong repeatedly spoke against monetary easing over concerns it would fuel a rise in property values, reflecting longstanding concerns that the country’s growth potential is eroded by real estate investment, heavy borrowing- and debt service costs, perpetuating inequality.

According to financial market sources, the breakthrough with U.S. tariff negotiations, Wednesday and the Fed’s policy path leaves the BOK in no rush to cut rates.

“The central bank is likely to keep the key rate unchanged through the end of this year,” a Kiwoom Securities report said. “It then is expected to deliver one final cut around February or in the first quarter of next year, signaling the end of the easing cycle.”

The assessment is backed by a 0.5 percent week-on-week rise in Seoul apartment prices as of the third week of this month, despite the introduction of new real estate regulations in mid-October.

The figure marks 38 consecutive weeks of rise and the largest one-week rise since 2013.

The Fed’s decision this week to trim its benchmark rate by 25 basis points to a range of 3.75-4.00 percent, following a similar move last month, is also considered favorable.

The latest cut reduced the interest rate differential to 1.5 percentage points, down from a record 2 percentage points earlier this year.

Adding to that stability, the tariff breakthrough between Korea and the U.S. eased a key source of trade uncertainty that has weighed on Korean exporters, especially in the manufacturing sectors.

The Korean currency immediately gained to 1,421 won per dollar, appreciating from the 1,430 won range maintained the week earlier.

“The central bank will likely maintain a wait-and-see stance through the year-end,” a SK Securities report said.

“With the output gap still negative, the easing cycle may resume eventually, but not before the housing market stabilizes.”

A negative output gap means the economy is producing less than its potential output. It signals weak demand and slack in the economy, strengthening the case for a rate cut to stimulate spending, investment and job creation.