MNI BOK WATCH: Governor Cautiously Flags Cuts

Bank of Korea Governor Rhee Chang-yong on Thursday signalled further rate cuts ahead amid a deteriorating economic outlook, but refrained from detailing the timing, following the board’s decision to hold the base rate at 2.5%. 

“Regarding future monetary policy, the Board considers it necessary to continue its rate-cut stance, given that inflation remains broadly stable and economic growth is forecast to remain low for the time being,” Rhee said at a press event following the board’s largely expected unanimous decision. (See MNI BOK WATCH: Board To Hold, Eye Future Cuts)

However, as short-term financial stability risks have risen sharply and uncertainties around fiscal and tariff policies remain high, the Board will determine the timing and size of further base rate cuts based on incoming economic data, he added.

The Bank will update growth forecasts at the next Aug 28 meeting, once the impact of U.S. tariffs and the supplementary budget are more fully assessed, Rhee noted. “We will continue to conduct monetary policy in such a way as to stabilise consumer price inflation at the target level over the medium-term horizon as we monitor economic growth while paying attention to financial stability.”

HOUSING, DEBT, TRADE RISKS

Rhee warned that risks to financial stability had increased, particularly in the housing market, citing a sharp rise in apartment prices and transaction volumes. The market has shown “some signs of stabilisation” following the government’s household debt measures, he continued.

If the bank lowers the policy rate prematurely amid high market uncertainties, it could boost real-estate prices and asset prices, he said in May. 

The governor also flagged significant uncertainty around the outlook for growth, citing weak exports and trade policy headwinds. “Economic growth is forecast to remain low for some time and there is high uncertainty related to trade negotiations, while the inflation rate remains broadly stable.”

Exports are expected to weaken due to the impact of the 25% U.S. “reciprocal” tariffs, which are set to take effect on Aug 1, he added. The BOK warned that the future path of growth remains clouded by uncertainties around the trajectory of domestic demand and the resolution of U.S.-Korea trade tensions.

INFLATION OUTLOOK STEADY

Rhee said inflation is expected to hover around 2% this year, aided by subdued demand and stable oil prices. Consequently, both headline and core inflation for this year are also expected to be generally consistent with the previous forecasts of 1.9%, he concluded.