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Bank of Korea keeps key interest rate unchanged amid won volatility, U.S. tariff tensions

Published: 17 Apr. 2025, 11:56

Bank of Korea (BOK) Gov. Rhee Chang-yong speaks at a Monetary Policy Committee meeting at the central bank in Jung District, central Seoul, on April 17. [JOINT PRESS CORPS]

The Bank of Korea (BOK) held its benchmark interest rate unchanged at 2.75 percent on Thursday, signaling a cautious stance as tensions escalate in the U.S.-China trade war.

The central bank said it would monitor the outcome of ongoing negotiations before making any policy moves, while concerns about the won's volatility further weighed against a rate cut.

The decision came during a monetary policy board meeting held at the BOK’s headquarters in Jung District, central Seoul.

“While inflation remains stable, downside risks to growth have increased due to sluggish economic activity in the first quarter and worsening global trade conditions,” the central bank said in its policy statement.

“However, given the high uncertainty stemming from shifting U.S. tariff policies and domestic stimulus measures, and the need to observe exchange rate volatility and household lending trends more closely, we decided it would be appropriate to maintain the current rate and assess further developments at home and abroad.”

The BOK had cut rates twice in succession last October and November, before pausing in January. Another cut followed in February in a bid to stimulate growth, but the global economic environment has since deteriorated, prompting a more cautious approach.

Calls for an additional rate cut grew louder as the economic slowdown deepened. However, immediate action was constrained by heightened currency market instability. The won, which had weakened to the 1,480 range against the dollar following the Trump administration’s tariff announcement, later rebounded to the 1,420 range amid a softer dollar and tariff deferrals.

Still, expectations remain high that the currency could slide past 1,500. In January, a stronger dollar coupled with domestic political tensions pushed the won into the high 1,400 bracket — a key factor in the central bank’s decision to hold rates steady.

Uncertainty also surrounds the U.S. Federal Reserve’s next move. While the possibility of a U.S. rate cut exists, the dual pressures of inflation and economic contraction caused by the reciprocal tariffs make a clear direction difficult to predict.

Fed Chair Jerome Powell recently said the scale of the tariffs is larger than expected and likely to exert lasting upward pressure on inflation, potentially delaying rate cuts. Conversely, Fed Gov. Christopher Waller said that if the tariffs are fully implemented, a rate cut would be inevitable.

Bank of Korea (BOK) Gov. Rhee Chang-yong bangs the gavel to open a Monetary Policy Committee meeting at the central bank in Jung District, central Seoul, on April 17. [JOINT PRESS CORPS]

The gap between the U.S. federal funds rate — currently at 4.25 to 4.5 percent — and Korea’s benchmark rate has widened to a maximum of 1.75 percentage points.

“Once the exchange rate stabilizes and the Fed moves to cut rates again, the BOK could consider following suit,” said Cho Young-moo, a research fellow at the LG Economic Research Institute.

Rising household debt was another reason behind the BOK’s decision to keep rates unchanged. The expiration of land transaction permit zones from Feb. 13 to March 23 triggered a rise in housing transactions, which is gradually being reflected in loan data.

As of April 11, the combined outstanding household loans at Korea’s five major banks — KB Kookmin, Shinhan, Hana, Woori and NH Nonghyup — stood at 739.87 trillion won ($520.8 billion), marking a 1.32 trillion won increase in just over two weeks, nearing March’s full-month rise of 1.79 trillion won.

The central bank and financial regulators believe excessive household debt threatens financial stability and could dampen consumption, prompting them to maintain a firm stance on macroprudential oversight.

Nevertheless, growing concerns about a prolonged downturn have kept expectations alive for a rate cut in May. In February, the BOK revised its 2024 growth forecast down from 1.9 percent to 1.5 percent. Some global investment banks project growth of less than 1 percent this year. Some suggest the central bank may wait until after the June presidential election and subsequent fiscal stimulus measures before moving on monetary policy.

The BOK also acknowledged in its statement that growth is likely to fall short of its February forecast.

“Although this year’s growth is expected to underperform our February projection of 1.5 percent, uncertainty remains extremely high regarding the path of the economy depending on trade negotiations, the timing and size of a supplementary budget and other factors,” the bank said.

“While we plan to continue a rate-cutting stance aimed at mitigating downside risks to growth, we will closely monitor changes in domestic and external policy conditions and their effects on inflation, household debt and the exchange rate to determine the timing and pace of any additional cuts.”

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.

BY KIM KYUNG-HEE [[email protected]]