BOK cuts policy rate after 38-month-long tightening cycle

Bank of Korea Governor Rhee Chang-yong speaks during a press conference at the central bank's headquarters in Seoul, Friday. Joint Press Corps

The Bank of Korea (BOK) lowered its key interest rate by 0.25 percentage points, Friday, ending a three-year and two-month rate freeze. This move reflects the stabilization of domestic inflation and aligns with similar actions by major economies like the U.S. and Europe.

Further reductions, however, are unlikely this year due to persistent concerns about high household debt, according to market watchers.

The BOK's monetary policy board reduced the rate from 3.5 percent to 3.25 percent, narrowing the interest rate gap with the U.S. to 1.25 percent.

Gov. Rhee Chang-yong noted that while there is room for further cuts, any future decisions will be closely tied to financial stability, cautioning that this latest cut should be viewed as "hawkish."

The central bank has assessed that maintaining a restrictive rate for an extended period is no longer necessary at this moment, especially as consumer price inflation dropped to 1.6 percent in September, driven largely by falling petroleum prices.

"Unless there are major changes, such as geopolitical risks in the Middle East, no significant shifts in the inflation trajectory is expected," Rhee said.

Another reason is that the growth of household debt has stabilized due to the government's strengthened policies.

"There has been notable progress. While next month's data will likely show an increase, reflecting the transactions from July and August, a decline is expected in October and November," Rhee said.

Rhee noted that apartment transactions in September were half those of July, and the price growth rate in the Seoul metropolitan area dropped to one-third of August's level.

"It is by no means that financial stability has been achieved based on the September (household debt) figures," he said. "The government's commitment to stabilizing household debt is strong, and we plan to coordinate policies with the government accordingly and monitor the situation closely."

Although the BOK has signaled the possibility of future rate cuts, any changes will be gradual.

Five out of the six monetary policy board members believe the base interest rate should be maintained at this level over the next three months, while one suggested the possibility of a cut below 3.25 percent should remain on the table.

The market consensus is also that the board will hold the base rate steady at its upcoming meeting on Nov. 28, and carefully monitor the market as concerns about household debt remain high.

Bank of Korea Governor Rhee Chang-yong, center, bangs a gavel ahead of a rate-setting meeting at the central bank's headquarters in central Seoul, Thursday. Yonhap

"With the U.S. making significant rate cuts, the BOK no longer had a strong reason to maintain high interest rates," said Joo Won, director of the Hyundai Research Institute. He added that he expects the rate to remain steady for the rest of this year, with a potential cut next year.

Ahn Dong-hyun, an economics professor at Seoul National University, also expects the BOK to cut the policy rate only once this year. "Although conditions are in place for a rate cut, such as a declining exchange rate and falling inflation, the situation doesn't allow for a reduction due to concerns over household debt."

Reflecting the concerns, Rhee also downplayed public expectations for the real estate market, warning that "the likelihood of the base rate returning to the previous level of 0.5 percent is extremely low."

He said, "Korea is not in a situation like the U.S. where it can lower the policy rate by 0.5 percentage points."

Eyes are on whether the rate cut can help the domestic economy recover. The central bank has been under pressure from the government to loosen its grip and to boost the sluggish domestic economy.

"In terms of consumption, the growth rate for the second half of the year is 1.8 percent, while the annual rate is 1.4 percent. Although this is lower than the potential growth rate of 2 percent, it signals a recovery phase," Rhee said.

Meanwhile, the benchmark KOSPI opened higher ahead of the monetary meeting, but it surrendered all its intraday gains and reversed, finishing the session at 2,596.91, a 0.09 percent decrease compared to Thursday. The won-dollar exchange rate, which opened above 1,350 won, also reversed direction during the session, dropping by 0.7 won to 1,349.5 won.