Bank of Korea Holds Base Rate at 2.50% Amid Stable Prices and Heightened Uncertainty
BOK MPC Decision Day
The Monetary Policy Committee (MPC) of the Bank of Korea (BOK) has determined that maintaining the Base Rate at the current level of 2.50% is appropriate. This decision was based on a combination of continued price stability and improving domestic growth, offset by significant uncertainty surrounding the economic outlook.
Rationale for Maintaining the Rate
While the domestic economy continues to improve, driven by sustained consumption recovery and robust export growth, the MPC cited several key factors requiring prudence:
Growth and Trade Uncertainty: Growth is improving, and exports are expected to remain robust, particularly due to the strong semiconductor market. However, the economic outlook is clouded by increasing uncertainties related to Korea-US and US-China trade negotiations. The impact of US tariffs is also expected to gradually increase. Current growth forecasts for this year (0.9%) and next (1.6%) are broadly in line with August projections.
Price Stability: Domestic prices continue to show a stable trend. The consumer price index rose by 2.1% in September, with the core price index (excluding food and energy) rising by 2.0%. Prices are expected to continue rising by around 2%.
Financial Stability Concerns: The Committee requires further assessment of financial stability factors. While the increase in household loans slowed significantly, the metropolitan area housing market saw price increases and transaction volumes expand again. Additionally, the won/dollar exchange rate rose significantly after late September due to uncertainties surrounding US-China tariff negotiations, resulting in increased exchange rate volatility.
Global and Market Conditions
Globally, growth is expected to slow gradually as the impact of US tariff increases becomes more visible. In international financial markets, the US Federal Reserve’s interest rate cut and the resurgence of the US-China trade conflict caused long-term government bond yields to fall. Domestically, stock prices rose sharply due to the booming semiconductor industry.
Future Policy Direction
The MPC reiterated that it will conduct monetary policy by monitoring growth and ensuring inflation remains stable. While the economy improves amid stable prices, uncertainties persist regarding trade negotiations and the semiconductor market.
The BOK intends to continue its policy of lowering interest rates going forward to mitigate downside risks to growth. However, the Committee will closely monitor changes in domestic and international policy conditions, price trends, and financial stability before determining the timing and pace of further base rate cuts.