Bank of Korea seen cutting interest rates by 25 bps in January

The Bank of Korea (BOK) is widely expected to cut interest rates by 25 basis points on Thursday amid the nation's softening economy and moderating inflation, a poll shows.

Some respondents betting on a quarter-point reduction predict a tight call on the rate decision. JPMorgan, UBS and BNP are also not ruling out the possibility that the central bank will leave interest rates unchanged at 3.00% this month.

They said the weakness in the Korean currency could pressure the BOK to hold off on further rate moves after two rate reductions last year.

According to a survey by the Korea Center for International Finance, six out of eight investment banks forecast a 25-basis-point rate cut to 2.75% on Jan. 16.

Goldman Sachs said the BOK’s rate decision will primarily be based on weakening growth momentum and further potential downside risks in domestic demand.

It said household debt growth, the biggest headache for the BOK last year, is decelerating due to a slowdown in housing transactions.

“Notwithstanding the recent US dollar strength on the prospect of moderating Fed easing, we do not expect forex considerations to constrain the BOK’s room for policy changes as much as before,” Goldman said in a note released on Monday.

The National Pension Service’s start of strategic currency hedging and recent relaxation of banks’ foreign borrowing are expected to prop up the Korean won, it added.

By contrast, Nomura and Barclays bet on an interest rate freeze as they see wild fluctuations in the domestic foreign exchange market posing a greater threat to local companies and financial markets.

In a separate survey of 20 economists conducted by The Korea Economic Daily on Tuesday, 12 respondents predict the BOK to cut interest rates by 25 basis points this week.

The South Korean won is forecast to hover in the mid-1,400s against the dollar through the third quarter of 2025, according to global investment banks polled last month.

The local currency surged to the 1,400 range to the greenback -- a level not seen since the 2009 global financial crisis -- in the aftermath of President Yoon Suk Yeol’s martial law decree and impeachment in December. 

Early this month, the Ministry of Economy and Finance slashed its forecast for domestic economic growth in 2025 to 1.8% from its earlier projection of 2.2% expansion.

Write to Jin-gyu Kang at joseph@hankyung.com
 


Yeonhee Kim edited this article.