The Bank of Korea left its main policy rate unchanged at 3.00 percent at its policy meeting held today, contrary to the consensus forecast for a further cut of 25 basis points to 2.75 percent. This follows a cut of 25 basis points at each of their two previous meetings 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 late November, data have shown increases in headline inflation from 1.3 percent in October to 1.5 percent in November and 1.9 percent in December, with core inflation steady over this period just below 2.0 percent. In the statement accompanying today's decision, officials expressed confidence that inflation will remain stable but advised that they are likely to revise down their growth forecasts in coming weeks.

Today's decision to leave rates on hold reflects uncertainties about the economic outlook but officials also noted recent exchange rate volatility in response to"unexpected political risks" and"the changing domestic political situation" following last month's short-lived period of martial law. These factors appear to have convinced officials that policy should stay on hold today, but they also signalled that further cuts will be considered in coming months to help mitigate downside risk to growth.

The Bank of Korea has its work cut out given political turmoil and other headwinds, including the threat of US tariffs. The consensus looks for another 25 basis point rate cut with more to come.

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.