Bank of Korea Holds Rates, Raises GDP and Inflation Forecasts

The Bank of Korea (BOK) has decided to keep its policy rate steady at 2.5% for the second consecutive meeting. This decision reflects the central bank’s cautious approach, primarily aimed at assessing the potential impact on housing prices, particularly in Seoul and its surrounding areas, which had previously experienced significant spikes. This move aligns with the expectations of economists surveyed by Reuters.

Key Highlights

• Policy Rate: Maintained at 2.5%.
• Inflation Forecast: Upgraded to 2% for 2025 (from 1.9%).
• GDP Growth Forecast: Revised upward to 0.9% for 2025 (from 0.8%).
• Housing Market: Monitoring housing prices in Seoul and surrounding areas.
• Household Debt: Observing household debt levels closely.

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Detailed Analysis

The BOK acknowledged that while inflation has stabilized and the economy has shown “modest improvement,” close monitoring of housing prices in Seoul and surrounding areas, along with household debt, remains essential. The bank noted a sharp slowdown in household loan growth but recognized that expectations for higher home prices remain strong. This delicate balance between economic improvement and potential financial risks necessitates a cautious monetary policy.

The upgraded inflation forecast for 2025 to 2% from 1.9% indicates the BOK’s expectation of continued price pressures. Similarly, the GDP growth forecast for 2025 was revised upward to 0.9% from 0.8%, reflecting a slightly more optimistic outlook for economic expansion. The central bank anticipates that domestic demand will experience a “modest recovery,” driven by a supplementary budget and an improvement in consumer sentiment.

However, the BOK also cautioned that while exports are likely to show favorable movements in the near term, they are expected to gradually slow down as the impacts of U.S. tariffs expand. This concern highlights the vulnerability of the South Korean economy to external trade pressures.

International Agreements and Trade

The central bank decision came shortly after South Korean President Lee Jae Myung’s meeting with U.S. President Donald Trump, resulting in several agreements between the two countries. These agreements include multibillion-dollar investment pledges from South Korean companies, a record $50 billion aviation purchase by Korean Air, and cooperation in areas such as shipbuilding and energy.

Under a July trade deal, Seoul is set to invest $350 billion in the U.S., including $150 billion for shipbuilding. Subsequently, South Korea saw its so-called “reciprocal” tariffs for its exports to the U.S. lowered to 15% from 25%, including for automobiles. These trade agreements could significantly influence South Korea’s economic outlook.

Economic Performance and Future Outlook

South Korea’s net exports powered its growth in the April to June period, leading to a better-than-expected showing, with GDP expanding 0.6% quarter over quarter and 0.5% from a year ago. Exports of goods and services constitute approximately 44% of South Korea’s GDP in 2023, according to the latest figures from the World Bank, with the U.S. being its second-largest export market after China.

Expert Opinions

A note by Bank of America analysts suggested that the BOK would be open to cutting its policy rates in the next three months, potentially with a rate cut in October. They also anticipated another cut in the first half of 2026 to keep rates stable at 2%. This perspective indicates that while the BOK is currently holding rates, future adjustments are likely depending on economic conditions.

Inflation in South Korea also seems supportive of a rate cut, coming in at 2.1% in July, which is just above the BOK’s target of 2%. This proximity to the target range provides the central bank with some flexibility in considering future rate adjustments.

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