BOK kicks off easing cycle to stimulate economy despite financial stability woes

The Bank of Korea initiated a new easing cycle with a 25 basis point rate cut.

Bank of Korea Gov. Rhee Chang-yong speaks during a press conference in central Seoul on Friday after the central bank cut its key rate to 3.25 percent. [YONHAP]

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With a 25 basis point cut Friday, the Bank of Korea (BOK) kicked off its first easing cycle in more than four years in line with steps taken in the United States, European Union, China and other countries across the globe.

The rate reduction to 3.25 percent underscores a shift in the focus of the country's monetary policy toward stimulating the economy from inflationary deceleration and financial stability with reduced levels of debt.

Analysts predict that the BOK will go on to cut rates to the 2 percent range by the end of next year.

“We continue to expect two 25 basis point rate cuts in 2025, likely in the first quarter of 2025 and the second half of 2025, bringing the policy rate to 2.75 percent by the end of 2025,” said Yoon Jee-ho, a senior economist at BNP Paribas, in a note.

“We see another cut in the first half of 2026, resulting in the policy rate reaching 2.5 percent, the midpoint of our estimated range of the nominal neutral rate (2.00-3.00 percent),” the economist said.

While the country’s inflation “shows a clear trend of stabilization,” the BOK struck a cautious note regarding financial stability, a factor that will determine the pace and degree of future rate cuts.

“Regarding financial stability, housing prices in the Seoul area and household debt growth are anticipated to gradually slow due to the effects of tightened macroprudential policies,” it said in a statement.

“However, it is still important to remain cautious of the associated risks such as the impact of the base rate cut on household debt,” it said.

BOK Gov. Rhee Chang-yong echoed the stance when he announced the forward guidance of monetary policy committee members. “Five committee members expressed their views to hold the key rate steady for the upcoming three months,” Rhee said during a news conference after the rate decision announcement, presenting the regular prognosticating forecast of six committee members excluding himself.

“If asked whether this can be interpreted as a hawkish cut, I would say yes — since we did exercise a cut, but with significant consideration for financial stability,” he said.

Household loans held by banks rose for a sixth straight month in September, led by a persistent increase in mortgages. Banks' outstanding household loans stood at 1,135.7 trillion won ($841 billion) as of the end of September, up 5.7 trillion won from a month ago, according to the data the BOK released Friday.

Regarding the Friday cut decision, Rhee said that Chang Yong-sung cast a dissenting vote in favor of holding the rate steady at its previous 3.5 percent.

The latest decision marks the BOK's first rate cut in more than four years after bank slashed its benchmark rate in May 2020. It formally entered a period of restrictive monetary policy in August 2021 after raising its rate from 0.5 percent to 0.75 percent.

One of the biggest factors behind the pivot is eased inflation.

Korea’s inflation fell below the 2 percent mark for the first time in more than three years in September primarily due to lower fuel prices. Still, the country's real GDP contracted 0.2 percent on quarter during the second quarter, prompting major institutions, including the Organisation for Economic Cooperation and Development, to revise down their projections for this year’s economic growth.

The move follows the U.S. Federal Reserve’s footsteps, as the bank lowered interest rates by half a percentage point to a range between 4.75 percent and 5 percent last month.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]