The Bank of Korea assessed that the three interest rate cuts since October of last year have contributed to lowering market interest rates and stimulating the economy. However, it warned that if political uncertainty persists both domestically and internationally, the economic stimulus effects may be limited. It evaluated that the influence of the interest rate cuts on household debt, prices, and the volatility of the won/dollar exchange rate was minimal.
In the 'Currency and Credit Policy Report (March 2025)' released on the 13th, the Bank of Korea examined the impacts of the benchmark interest rate cuts implemented three times since October of last year (a total of 75 basis points, with 1 basis point equal to 0.01 percentage points) on the country's growth, prices, household debt, and exchange rates.
A cut in the benchmark interest rate has the effect of lowering market interest rates and lending rates, thus promoting investment and consumption. According to the Bank of Korea, as expectations for interest rate cuts have been priced in, long-term interest rates have declined significantly, and short-term interest rates have also been adjusted substantially.
An improvement in consumer sentiment is also expected. Typically, a cut in the benchmark interest rate enhances the sentiment of economic agents, stimulating the real economy. In particular, the Bank of Korea believes that since consumer sentiment has been temporarily dampened due to the impact of the state of emergency, the interest rate cuts are likely to help improve sentiment. However, it expressed concerns that if uncertainty persists for an extended period, the economic stimulus effects through sentiment improvement may diminish.
The Bank of Korea predicted that the impact of the current interest rate reduction phase on household debt would be smaller than before. In the context of strengthening macroprudential policies, the effects of interest rate cuts on housing prices and household debt are expected to be reduced compared to previous easing phases.
However, the Bank of Korea pointed out that recent measures by banks to relax management of household loans and the lifting of designations of land transaction permission areas in some areas of Seoul could stimulate household debt. Accordingly, it advised that if the growth rate of household loans expands again, further strengthening of macroprudential regulations, such as the expansion of the total debt repayment ratio (DSR) application scope, should be implemented.
The Bank of Korea also assessed that the influence of interest rate cuts on exchange rate and price trends was limited. The exchange rate has been more significantly affected by domestic political uncertainties and changes in U.S. economic policies since the end of last year, and it determined that the inflationary pressures from the interest rate cuts are not sufficient to hinder stable price movements.
However, the Bank of Korea stated that, "Given the increased uncertainty regarding the pace of interest rate cuts by the Federal Reserve and the heightened vigilance in the foreign exchange market, the exchange rate may respond more sensitively to the interest rate differences domestically and internationally, leading to increased volatility," adding, "We plan to continually assess the comprehensive impacts of benchmark interest rate cuts on prices, growth, and financial stability, and reflect this in the implementation of monetary policy."