The Bank of Korea lowered its main policy rate by 25 basis points from 3.25 percent to 3.00 percent at its policy meeting held today, contrary to the consensus forecast for no change. This follows a cut at their previous meeting in October after officials had previously advised that a rate cut at upcoming meetings may be considered. Policy rates have been at restrictive levels since early 2023 as part of efforts to return headline inflation to their target level of 2.0 percent.

Since the previous BoK meeting early October, data have shown falls in headline inflation from 1.6 percent in September to 1.3 percent in October, with core inflation easing from 2.0 percent in September to 1.8 percent in October. In the statement accompanying today's decision, officials retained their forecast for core inflation to average 2.2 percent this year and revised their 2025 forecast down slightly from 2.0 percent to 1.9 percent. Officials also continue to expect moderate economic growth, forecasting GDP to expand by 2.2 percent this year and 1.9 percent next year, down from their previous forecasts of 2.4 percent and 2.1 percent respectively.

Although officials reaffirmed that they expect that inflation will stabilize around its current level, they are uncertain about the growth outlook and again noted risks from volatility in the foreign exchange market. This, they concluded, provided scope to reduce policy rates today and they also indicated that further rate cuts will be considered in upcoming meetings.

After kicking off its rate cutting cycle with a 25 basis point cut to 3.25 percent in October, forecasters look for the BOK to keep rates steady this week.

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.