S. Korea Central Bank Unexpectedly Cuts Interest Rates by 25 Basis Points

01 End of 21-month pause, South Korea's central bank cuts interest rates by 25 basis points!

On October 11th, the Bank of Korea announced that in its monetary policy assessment, it lowered the benchmark interest rate by 25 basis points to 3.25%, that is to say: the Bank of Korea announced an interest rate hike of 25 basis points.

It is worth mentioning that this is also the first time the Bank of Korea has cut interest rates in 4 and a half years, ending a continuous 21-month pause in interest rates.

It should be noted that the last time the Bank of Korea cut interest rates was in May 2020, and since February 2023, the Bank of Korea has consecutively 13 times "stood still" at interest rate meetings.

02 Why is South Korea cutting interest rates at this time?

So the question arises: why is the Bank of Korea cutting interest rates at this time?

In fact, whether it is the cooling of inflation, the slowdown in economic growth, or the efforts made by the South Korean government to curb mortgage loans that exacerbate household debt, all of these have become reasons for the Bank of Korea to cut interest rates.

Looking at specific data, in the second quarter of this year, South Korea's GDP shrank, private consumption is declining, and the overall inflation rate in September is also lower than the central bank's 2% target.

In addition, due to considerations of overheating in the South Korean real estate market and a significant increase in household debt, this is also the reason why the Bank of Korea has been hesitant to act. However, in the past few weeks, the cooling of real estate transactions in South Korea has also given policymakers at the Bank of Korea some (operational) space to focus on promoting economic growth.Of course, in addition to internal economic factors, there are also some external factors pushing for a rate cut in South Korea. For instance, central banks in the United States, Europe, and some Asian countries have already initiated an easing cycle, which also puts pressure on the Bank of Korea to relax its policy settings.

03 What will the Bank of Korea's policy be going forward?

The last question: What will the Bank of Korea's policy be going forward?

In this regard, analysts predict that the Bank of Korea may opt for a gradual easing of policies, and by the end of 2025, the Bank of Korea will likely reduce interest rates to a range of 2.50% to 2.75%.

However, one thing to keep in mind is that although there are signs of cooling in the South Korean real estate market, the Bank of Korea will still slow down the pace of further reducing borrowing costs in the future, as curbing real estate prices and increasing household debt remain important considerations.