Bank of Korea Faces a Balancing Act: High Rates and Global Economic Pressure

The Bank of Korea (BOK) will maintain its policy rate at 3.50%, a 15-year high, but is expected to cut rates next quarter in alignment with the U.S. Federal Reserve. Rising household debt and potential inflation pressures complicate the outlook, with forecasts predicting improved economic growth and controlled inflation through 2025.

The Bank of Korea (BOK) has decided to keep its policy rate steady at 3.50%, marking the highest level in 15 years, according to a Reuters poll. Economists forecast the central bank will implement a rate cut next quarter, coinciding with expected policy easing from the U.S. Federal Reserve.

South Korea's inflation, which cooled to an 11-month low of 2.4% in June, remains above the BOK's target of 2%, and the won has weakened by over 6% against the U.S. dollar this year. These factors leave the BOK with limited room to adopt a more dovish stance at this point. All 40 economists surveyed anticipated the base rate to remain at 3.50% during the upcoming July 11 meeting.

Economists predict that interest rates will continue unchanged through the next quarter. A 25 basis-point cut to 3.25% is anticipated in the final three months of the year. Senior economist Min Joo Kang from ING noted that the first rate cut might occur in October due to increasing household debt and inflation risks.

(With inputs from agencies.)