^{Getty Images}

Policy Decision in Line with Expectations

The Bank of Korea (BOK) left its benchmark interest rate unchanged at 2.5% for the second consecutive meeting, a move widely anticipated by economists. The decision reflects the central bank’s cautious approach in balancing modest economic growth with the risks posed by rising housing prices in Seoul and its surrounding areas.

Officials said that while household loan growth has slowed sharply, expectations of further increases in home prices remain elevated. The central bank highlighted the need to closely monitor both real estate trends and debt levels before taking additional monetary policy action.

Inflation and Growth Forecasts Upgraded

The BOK raised its 2025 inflation forecast to 2%, slightly higher than its previous projection of 1.9%, signaling concerns about persistent price pressures. At the same time, the central bank upgraded its GDP growth forecast to 0.9%, up from 0.8% previously, citing stronger domestic demand and improved consumer sentiment.

Officials noted that domestic demand is expected to recover modestly, supported by a supplementary budget and stronger household spending. Meanwhile, exports — a critical driver of South Korea’s economy — are projected to remain robust in the short term before slowing as the impact of new U.S. tariffs takes hold.

Seoul’s Housing Market Remains a Key Concern

Seoul’s housing market continues to weigh heavily on the central bank’s decisions. After a surge in prices earlier this year, authorities introduced measures aimed at cooling speculation. However, expectations of further gains remain high, particularly as low borrowing costs continue to encourage demand.

Household debt, one of the highest among advanced economies relative to GDP, remains another key vulnerability. The BOK stressed that it will maintain a watchful eye on borrowing patterns, even as the pace of new loans has eased.

Trade Relations and External Factors

The central bank’s decision also comes in the context of shifting trade dynamics between South Korea and its largest partners. Just days before the meeting, President Lee Jae Myung met U.S. President Donald Trump, resulting in several high-profile agreements. These included:

• $50 billion in aircraft purchases by Korean Air
• South Korea’s pledge to invest $350 billion in the U.S., including $150 billion in shipbuilding
• Reduced “reciprocal” tariffs on South Korean exports to the U.S., with rates for automobiles cut to 15% from 25%

Exports, which account for 44% of South Korea’s GDP in 2023 (World Bank data), remain a crucial growth pillar. In the April–June quarter, GDP expanded 0.6% quarter-over-quarter and 0.5% year-over-year, largely thanks to stronger trade performance.

Outlook for Monetary Policy

Looking ahead, analysts are divided on whether the BOK will shift toward easing. A note from Bank of America suggested the central bank could consider its first rate cut as early as October, followed by another reduction in the first half of 2026, stabilizing rates at 2%.

Inflation data supports the possibility of a cut, with consumer prices rising 2.1% in July, just above the central bank’s 2% target. While the inflation outlook appears manageable, risks in the housing market could limit how aggressively policymakers ease monetary policy.

The Bottom Line

The BOK’s decision to hold rates underscores its cautious balancing act: supporting growth without inflaming risks in the real estate market. With external trade factors, domestic debt, and global tariffs all in play, the central bank faces a complex policy environment heading into 2025.

‍