Bank of Korea Holds Rate, Cites Financial Stability Risks

Seoul, South Korea - South Korea's central bank kept its benchmark interest rate at 3.50% on Thursday, citing the need to monitor financial stability risks despite slowing inflation.

The Bank of Korea maintained its restrictive policy stance as it assessed the impact of recent government measures on the housing market, household debt, and global market volatility.

The central bank revised its 2024 growth forecast to 2.4% from 2.5% while projecting 2.1% growth for 2025. 

Inflation forecasts were also adjusted. 2024 consumer price inflation is now expected at 2.5%, down from the previous estimate of 2.6%.

The Bank of Korea Governor stated, 

"The Board will continue to conduct monetary policy to stabilize consumer price inflation at the target level over the medium-term horizon as it monitors economic growth while paying attention to financial stability."

Consumer price inflation rose 2.6% in July, driven by increased petroleum product prices. However, core inflation remained steady at 2.2%.

The central bank expects inflation to fluctuate in the low 2% range in the coming months, projecting rates of 2.5% for 2024 and 2.1% for 2025.

The Bank of Korea noted increased volatility in financial markets, with stock prices experiencing significant fluctuations and long-term Korean Treasury bond yields falling considerably.

Housing prices in Seoul and surrounding areas have increased while household loans continue to grow, primarily due to housing-related borrowing.

The Bank of Korea emphasized the need to assess the trade-offs among policy variables such as inflation, growth, and financial stability before considering the timing of potential rate cuts.

Global economic uncertainties, particularly in major economies like the U.S. and China, were highlighted as factors influencing South Korea's economic outlook.

The central bank will continue monitoring developments in global financial markets, including concerns over a potential U.S. economic slowdown and the unwinding of the yen carry trade.

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