The Bank of Korea has cut its policy rate for the first time in over four years, aligning with the global trend of easing monetary policies to support economic growth. The central bank lowered the seven-day repo rate by 25 basis points, bringing it to 3.25%, thus ending its longest streak of rate stability. This move comes as inflation cools and economic growth slows, while the government seeks to manage rising household debt spurred by mortgage loans.
Amid one of the most prolonged periods of interest rate stability since February 2023, Korea's economy showed signs of strain with a contraction in GDP during the second quarter. Furthermore, consumer spending has waned, and September's inflation rate fell short of the central bank’s 2% target. These conditions prompted the central bank's monetary policy shift.
Concerns about Seoul’s hot real estate market and increasing household debt had previously delayed the decision to alter policy. However, the cooled housing transactions in recent weeks provided policymakers some leeway to focus on revitalizing economic growth.
The rate cut follows similar actions by central banks in the United States, Europe, New Zealand, and other Asian countries, which have embarked on easing cycles. This international monetary policy context applies additional pressure on the Bank of Korea to adapt a more accommodating stance. Analysts predict that Korea’s central bank will gradually ease policies further, potentially lowering the rate to between 2.50% and 2.75% by the end of 2025.
The choice to lower borrowing costs, despite clear macroeconomic circumstances, remains cautious due to persistent financial stability concerns. Analysts suggest that the Bank of Korea will proceed slowly with further reductions to account for the risk of reigniting issues in the property market and exacerbating household debt.