BOK Holds Key Rate at 3.00% After Back-to-Back Hikes

The Bank of Korea (BOK) has halted its efforts to raise interest rates after raising them twice in a row, opting for a pause to evaluate the effects of previous policy decisions. On October 22, the Monetary Policy Board maintained the benchmark interest rate at 3.00%, following 0.25 percentage point hikes in July and August. This decision came after considering the impact of rate hikes on consumption, investment, and inflation, and the mounting debt burden on households and businesses.

For every 0.25-percentage-point increase, households face about 3.3 trillion won or $2.49 billion in additional annual interest costs, while businesses face around 3.6 trillion won.

BOK Governor Shin Hyun-song cited struggles faced by financially vulnerable borrowers during a parliamentary audit on October 12, stressing the importance of government support in such situations. The South Korean won experienced a decline against the US dollar, reaching an intraday low of 1,322.8 won, the lowest level since October 2024. This weakened currency offered additional room for the central bank to hold rates steady. The stronger won helped curb imported inflation, lessening some pressure for further hikes.

While the US Federal Reserve increased its benchmark rate to a range of 3.75%-4.00% in the previous month, the BOK focused on domestic economic conditions rather than reacting to the interest rate gap between the two nations. Despite the pause, markets do not consider the decision an end to the tightening cycle. Inflation slowed to 2.9% in September but remained above the BOK's 2.0% target.

Concerns exist about potential inflation persistence due to higher global oil prices and demand pressures from the semiconductor boom. Additionally, housing market developments and rising household debt have kept policymakers cautious. Mid- to lower-priced home prices continue to increase, especially in outer Seoul and southern Gyeonggi Province, while commercial bank lending has returned to growth this month after declining in September.

BOK Governor Shin has previously warned about the need for early intervention before financial imbalances become more challenging to manage, implying that further rate hikes are possible. Market analysts are split on whether the BOK will resume tightening in November or wait until the first quarter of 2027. Analysts like An Ye-ha and Kim Ji-na predict a rate increase in November, citing robust semiconductor-led exports and rising oil prices as key factors.

Other analysts, such as Jeong Hyeong-ju and Jo Yong-gu, project the next hike for February 2027, emphasizing financial stability concerns like foreign exchange market volatility as potential triggers. Kim Ji-man at Samsung Securities anticipates an additional hike in November, with a terminal rate forecast of 3.75%, but acknowledges risks to this outlook if inflation eases.

The final rate-setting meeting of the year is scheduled for November 26, with GDP growth and October inflation data expected to be crucial in the decision-making process.