BOK to keep rate at 3.25% in Nov despite dim GDP outlook: survey

South Korea’s central bank is expected to freeze its policy rate at 3.25% during its last monetary policy meeting of the year to prevent any further fall in the country’s currency value against the US dollar, according to a survey conducted by The Korea Economic Daily on Monday.

Of 19 economists responding to the Korean economic newspaper’s survey Thursday on the Bank of Korea’s (BOK) decision on interest rates, 16 predicted that the BOK will hold its policy rate unchanged at 3.25% after a quarter percentage point cut in the previous meeting.

They cited the country’s volatile dollar/won exchange rate as the chief reason for a rate freeze at the central bank’s final monetary policy meeting of 2024.

“3.25% is not a restrictive level (to economic growth),” said Lee Seung-heon, a professor of business at Soongsil University and former BOK deputy governor.

“Big rate cuts could further strengthen the US dollar against the Korean won above 1,400 and set off a jump in real estate prices, which could result in economic instability.”

Lee Seung-hoon, an economist at Meritz Securities Co., also bet on a rate hold, saying that concerns about the highly volatile dollar/won rate outweigh concerns over domestic demand for now.

In October, the BOK lowered its benchmark rate by 25 basis points to 3.25%, marking its first rate cut since May 2020 and ending its monetary tightening cycle, which began in August 2021.

After the rate cut, BOK Governor Rhee Chang-yong flagged more rate cuts but only in slow and gradual steps, citing the country’s high household debt.

Other economists suggested that the BOK make a rate move after confirming the US Federal Reserve’s monetary policy stance next month.

“The BOK is expected to make additional rate cuts after checking the Fed’s forward guidance in December,” said Min Ji-hee, a fixed-income analyst at Mirae Asset Securities Co.  

According to the poll, the BOK’s policy rate is forecast to go down at a gradual pace. The median rate of those suggested by the 19 economists stood at 3.25% at the end of 2024 and 2.75% in the first half of 2025.

It is expected to drop further to 2.50% at the end of 2025 and in 2026.

VOLATILE DOLLAR/WON RATE MOVES

A majority of the survey respondents, 17 out of 18, predicted the US dollar would further strengthen against the Korean won to above 1,410 at the end of this year and 12 respondents, or 66.7%, projected it would top 1,420.

But those polled expected the dollar/won rate to stabilize next year in line with the dollar’s gradual softening.

“The latest strong dollar has been largely driven by uncertainties over the Donald Trump administration’s policies,” said Park Choon-sung, a research fellow at the Korea Institute of Finance. “The dollar is expected to soften somewhat after the Trump government takes office in January.”

Yet the dollar/won rate is forecast to remain above 1,350 even after its anticipated fall throughout next year, according to the survey.

Of the survey respondents, seven economists, or 36.8%, forecast the dollar/won rate would hover between 1,350 and 1,400 at the end of the first half of 2025 and the end of next year. Fewer than 20%, or three economists, projected the rate would drop to the 1,200 won range at the end of next year.

Some even expected the dollar to regain ground against the won after the latter half of 2025, from the low 1,300s level in the first half of next year to above 1,350 won in the second half on concerns over tax reduction-driven inflation.  

GLOOMY OUTLOOK FOR ASIA’S NO. 4 ECONOMY

Economists express serious concerns about the Korean economy, according to the poll.

Of the survey respondents, 12 economists, or 63.2%, forecast that Asia’s fourth-largest economy will record 2.2% growth this year, and three, or 15.8%, projected 2.1% growth. Many of them have grown more bearish about the Korean economy since August, when 95% of them projected growth of 2.3% this year.

More than half of respondents, or 12 economists, forecast that the Korean economy will expand by less than 2% in 2025.

Park Seok-gil, executive director of JPMorgan Chase Bank Asia Economic Research, projected that the Korean economy will grow less than 1.8% next year due to the country’s fizzling exports and weak domestic consumption.

“Korea’s potential economic growth rate has already retreated to the 1.8% range, meaning the country’s economy would grow 1.8% next year,” said NH Investment & Securities economist Ahn Ki-tae.

Last week, the International Monetary Fund lowered its growth outlook for Korea to 2% for 2025 from its previous 2.2% growth forecast in October, citing high economic uncertainties and weak domestic demand.

The BOK projects 2.1% growth while the Korean government and the Organization for Economic Co-operation and Development maintained a forecast of a 2.2% gain.

Write to Jin-gyu Kang at josep@hankyung.com
Sookyung Seo edited this article.