The Bank of Korea lowered its main policy rate by 25 basis points from 3.50 percent to 3.25 percent at its policy meeting held today, in line with the consensus forecast. At their two previous policy meetings officials had advised that a rate cut at upcoming meetings may be considered. Officials had left this rate on hold since the start of 2023 after tightening policy aggressively over 2022 as part of efforts to return headline inflation to their target level of 2.0 percent.

Since the previous BoK meeting late August, data have shown falls in headline inflation from 2.6 percent in August to 2.0 percent in August and 1.6 percent in September, with core inflation easing to 2.0 percent in September. In the statement accompanying today's decision, officials retained their forecast for core inflation to average 2.2 percent this year and 2.0 percent in 2025 but noted uncertainties about the outlook. Officials also continue to expect moderate economic growth, forecasting GDP to expand by 2.4 percent this year and 2.1 percent next year.

Officials reaffirmed that they expect"that inflation will stabilize at the target level and that the moderate growth trend will continue" and assessed that risks in the foreign exchange market have eased. This, they concluded, provided scope to reduce policy rates today and they also indicated that further rate cuts will be considered in upcoming meetings.

Amid cooling inflation, the Bank of Korea is expected to lower its policy interest rate by 25 basis points to 3.25% after having left it at a restrictive level of 3.50% for 13th consecutive meetings. The annual inflation rate has eased to 1.6% in September, below the bank's 2% target, from 2.0 percent in August and 2.6% in July. The bank last raised the Base Rate by 25 basis points to 3.50 in January 2023.

South Korea’s central bank, the Bank of Korea (BoK), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the base rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) at 2 percent over the medium-term.

The Bank of Korea determines interest rate policy at eight meetings during the year. A post-meeting statement is issued after each meeting. The Bank also publishes its Monetary Policy report four times a year and updates economic forecasts twice a year.

Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The Bank has an inflation target at 2 percent over the medium-term. The inflation control target is set by the Bank of Korea in consultation with the government and is reviewed every two years.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.