The Monetary Policy Committee of the Bank of Korea has kept the base interest rate unchanged at 2.75% per annum, halting the downward trend that resumed last February. It seems they decided to maintain the rate due to increased volatility in the won-dollar exchange rate caused by uncertainties surrounding U.S. tariff policy, along with rising housing prices in response to the lifting of the land transaction permit system and expanded reassignment.
The Monetary Policy Committee (hereafter referred to as the MPC) decided to maintain the base interest rate at 2.75% during its regular meeting on the 17th. The Bank of Korea raised the base rate from 0.5% to 3.5% from August 2021 to January 2023 and kept it unchanged for 1 year and 7 months. It then lowered the rate twice in October and November last year, and after holding it steady in January, it resumed cuts in February, reducing the rate to 2.75%.
The MPC noted in its monetary policy direction resolution, "We deemed it appropriate to maintain the current level of the base interest rate while monitoring changes in domestic and external conditions," and stated, "The MPC will operate monetary policy with careful attention to financial stability while ensuring that inflation rates can stabilize at targeted levels over the medium term."
Ahead of the MPC meeting, the market largely expected the base interest rate to be kept unchanged. According to a survey conducted by the Korea Financial Investment Association of 100 people involved in bond holding and management from the 4th to the 9th, 88% of respondents anticipated a rate freeze. This marked a 43 percentage point increase compared to the previous survey conducted in February.
The main basis for the freeze cited by the market was the fluctuating tariff policy of U.S. President Donald Trump, which has increased exchange rate volatility. The exchange rate spiked to 1,487.60 won on the 9th, the day the U.S. imposed reciprocal tariffs, but dropped sharply to 1,446.0 won the next day after the U.S. government announced a 90-day deferment. As the tariff war between the U.S. and China escalated, the dollar weakened, and the exchange rate fell to the 1,410 won range.
Some experts say that housing prices and household debt trends should be closely monitored due to the lifting of the land transaction permit system and expanded reassignment. According to the Korea Real Estate Board, the comprehensive housing price index for Seoul (including apartments, multi-family housing, and single-family housing) rose by 0.52% compared to the previous month, marking a greater increase than the 0.18% rise last month. This was the largest increase since September of last year (0.54%). The Bank of Korea expects the impact of related loans to be fully reflected starting in April.
The Federal Reserve's (Fed) move to adjust the speed of interest rate cuts has also bolstered cautious sentiment. Jerome Powell, Chair of the Federal Reserve, emphasized in a speech at the Chicago Economic Club in Illinois on the 16th (local time) that the tariffs from the Trump administration are "significantly larger than expected," stating, "For now, we are in a good position to wait for clearer results." This indicates a firm stance on not considering immediate cuts to the base interest rate while closely monitoring the economic situation.
However, there is also the possibility of resuming interest rate cuts in the future. The political uncertainty that had been alleviated by the impeachment of former President Yoon Seok-youl is expanding again ahead of the early presidential election, raising concerns of weakened consumer sentiment. According to data submitted by a member of the Strategy and Finance Committee, Lim Gwang-hyun, the political uncertainty index was recorded at 2.5 (seven-day moving average) as of the 13th, which is significantly higher than the level maintained in early December last year (0.4-0.5) prior to the emergency state.
The mounting downward pressure on the economy due to the U.S. reciprocal tariff policy also increases the need for interest rate cuts. Global investment bank Morgan Stanley has downgraded its economic growth forecast for Korea this year from 1.5% to 1.0% following the tariff announcement. JP Morgan predicts that Korea will only grow by 0.7% this year, while Capital Economics of the UK and Citibank foresee a growth rate of 0.9%. If the decline in growth rate becomes evident, the Bank of Korea may lower the interest rates to stimulate the economy.
Jo Yong-gu, a researcher at Shinyoung Securities, stated, "As the downward pressure on the economy increases due to Trump's tariffs, the need for proactive economic measures has grown. However, given the significant uncertainties surrounding tariff policies, it is necessary to observe their effects, and in consideration of financial stability, including the exchange rate and household debt increase, it is expected that the MPC will decide to keep the interest rate unchanged this time."