Bank of Korea Likely to Hold Rates Steady Amid Economic Pressures

The Bank of Korea (BOK) is expected to maintain its policy rate at 2.5% during an upcoming review meeting on June 29, 2025. This decision is largely influenced by concerns over financial stability, high household debt levels, and the challenges of adjusting rates ahead of the United States Federal Reserve. A recent survey conducted by the Korea Economic Daily (KED) among 20 economists revealed that 18 anticipate no change to the base rate, while only two expect a reduction to 2.25%.

Economist Shin Kwanho from Korea University highlighted ongoing risks in the property market, stating, “Property market risks remain elevated.” Similarly, Park Seok Gil, head of research at JPMorgan, noted that considerations of financial stability will heavily influence the BOK’s decision this Thursday. Others, including former BOK deputy governor Lee Seung-heon and Joo Won from the Hyundai Research Institute, cited rising property prices and household debt as significant constraints.

Central Bank’s Reluctance to Act Before the Fed

Most economists in the survey emphasized that the BOK is likely to refrain from making any moves until after the Federal Reserve decides on its rates. Lee Sang-ho, head of economic research at the Federation of Korean Industries, stated, “A widening interest-rate gap with the US would put pressure on the won.” Hana Securities strategist Lee Jae-man remarked on Jerome Powell‘s comments at the recent Jackson Hole conference, describing them as “dovish,” but insufficient to alter the Fed’s trajectory. He concluded that the BOK will likely follow the Fed’s lead.

BOK Governor Rhee Chang-yong has advocated for a cautious approach to monetary easing, warning that excessive interest rate cuts could exacerbate asset bubbles and increase currency volatility, particularly as the economy faces pressure to recover.

Mixed Predictions on Rate Cuts

While the majority of economists anticipate that the BOK will stand firm, two KED economists believe an early rate cut is possible. Kathleen Oh, chief Korea and Taiwan economist at Morgan Stanley, noted that higher US tariffs could justify a preemptive move by the BOK. In contrast, Lee Yoon-soo, an economics professor at Sogang University, suggested that if no action is taken this week, an October cut should be considered, especially in light of Powell’s dovish remarks.

Survey participants project that the BOK may implement only one rate cut before the end of the year, potentially lowering the base rate to an average of 2.23%.

Growth Projections Remain Subdued

Economic growth in South Korea is expected to remain modest, with KED economists projecting a 0.94% expansion for the year. This forecast aligns with the Finance Ministry’s estimate of 0.9% and is slightly below the 0.98% average forecast from eight global investment banks. Seok Byoung-hoon, an economics professor at Ewha Womans University, indicated that two rounds of supplementary budgets might only contribute an additional 0.1 percentage point to GDP growth.

Analyst Min Jihee from Mirae Asset Securities observed that while private consumption is likely to recover, weakness in construction and facility investment, along with declining net exports, will hinder overall economic performance. In May, the BOK revised its full-year growth forecast down to 0.8% from an earlier 1.5%. The GDP had expanded by 2% in 2024.

During the last monetary policy review meeting on July 10, the BOK decided to maintain its policy rate at 2.5%, citing stable inflation rates and lower growth estimates. As of June, Korea’s headline inflation stood at 2.2%, just above the BOK’s target of 2%.