The Bank of Korea (BOK) will continue its rate cut strategy to address downside risks to economic growth.

The Bank of Korea (BOK) will continue its rate cut strategy to address downside risks to economic growth.

The Bank of Korea (BOK) is set to resume its interest rate cuts next month, following a pause in July, according to a Reuters poll of economists. The central bank's decision reflects its ongoing efforts to support economic growth while managing risks from household debt and volatile real estate markets [1].

Government data showed that home-backed mortgage loans in South Korea rose by 5.6 trillion won ($4.1 billion) in May, accelerating from a 4.8 trillion won increase in April. This surge in mortgage loans is likely to influence the BOK's monetary policy, despite the central bank's overall easing path [1].

The BOK's pause in July is not considered unusual, as financial stability and housing market concerns have always been part of its policy considerations. However, the recent surge in home prices in Seoul and the consequent increase in mortgage loans have added a new dimension to the debate [1].

Even after 100 basis points of cuts since late last year, the minutes of the May meeting showed that board members believed it was necessary to continue easing monetary policy to support economic growth. The economy contracted by 0.2% in the first quarter of 2025, and inflation remained stable at around 2% [1].

A significant majority of economists, 22 of 31, expect the BOK to lower the policy rate by 25 basis points to 2.25% by the end of the quarter. However, views diverge on where rates will end the year, with half of economists expecting rates to fall to 2.25% and the other half predicting a rate of 2.00% by end-2025 [1].

The BOK's rate cut strategy is aimed at addressing downside risks to economic growth, particularly in light of a slowing economy and the lack of progress on a trade deal with the United States. The poll showed economists reducing their 2025 growth forecast to 0.9% from 1.3% expected in April, aligning with the central bank's projection of 0.8% [1].

Investors should adopt a risk-aware, sector-diversified approach, with a focus on defensive sectors such as consumer staples and healthcare. The upcoming presidential election in June introduces political uncertainty, making volatility-linked instruments and hedging strategies essential [2].

The BOK's policy inertia creates sectoral winners and losers, with export-heavy sectors facing U.S. tariff uncertainties and domestic consumption plays benefiting from low rates and stable household spending. Real estate investment trusts (REITs) offer income opportunities but require hedging against currency risk [2].

In conclusion, the BOK's rate cut strategy is designed to address downside risks to economic growth, particularly in light of a slowing economy and the lack of progress on a trade deal with the United States. Investors should adopt a nuanced approach, focusing on sectors insulated from trade risks and pricing in potential downside. With the next policy meeting in July 2025, patience and flexibility will be key to capitalizing on South Korea's evolving landscape [2].

References:
[1] https://www.marketscreener.com/news/latest/Bank-of-Korea-to-pause-easing-in-July-amid-household-debt-surge-50451715/
[2] https://www.ainvest.com/news/bok-rate-hold-creates-tension-inflation-control-real-estate-risks-opportunities-lurk-korean-equities-2507/