Due to moderate inflation pressures and stable semiconductor exports, the Bank of Korea is expected to keep its benchmark interest rate unchanged this week, providing policymakers room to assess financial stability risks linked to overheating in the real estate market. A survey of 22 economists showed unanimous expectation that the central bank will maintain the seven-day repurchase rate at 2.5% on Thursday. At its January meeting, the policy committee unanimously decided to hold rates steady and removed language hinting at possible further rate cuts, signaling a shift toward a neutral policy stance. The central bank will also release updated economic growth and inflation forecasts.
Strong semiconductor export data supports economists' expectations that the bank may raise its 2026 GDP growth forecast from 1.8% to 2%. Meanwhile, inflation projections are expected to remain near the central bank's 2% target. Minutes from the January 15 meeting revealed that one committee member still sees room for further policy easing if risks related to the weak won and high home prices subside, given sluggish domestic demand and a persistent negative output gap. However, other members emphasized financial stability risks, warning that easing could exacerbate financial imbalances and exchange rate volatility.
Recent economic data suggests limited urgency for policy adjustment. The consumer price index rose 2% year-on-year in January, slowing from 2.3% in December. Core inflation also held steady at 2%, in line with the central bank's target. Although officials remain watchful of exchange rate fluctuations and food price risks, current inflation does not impose a strict constraint on policy.
Growth trends remain mixed. Early data indicate that exports continued to grow in February, supported by strong semiconductor demand driven by sustained investment in artificial intelligence and data centers. BNP Paribas economist Jeeho Yoon noted, "We expect the Bank of Korea’s policy statement to strike a balanced tone while highlighting upside risks to growth and inflation. There is no pressing need for a policy rate adjustment at this time."
However, outside the semiconductor sector, growth momentum remains weak. Domestic demand continues to be sluggish, and external risks persist. Following the U.S. Supreme Court's rejection of the Trump administration's reciprocal tariff policy last week, uncertainty around U.S. trade policy has resurfaced. Although South Korea stated that its trade agreement with the U.S. remains valid, the U.S. government is preparing to launch a series of new national security investigations under Section 232 of the Trade Expansion Act of 1962, which could pave the way for new tariffs by the Trump administration. Even before the court ruling, Trump had threatened to reimpose a 25% tariff on South Korean goods, citing unfulfilled investment commitments under last year's trade agreement. While South Korean officials have sought to downplay risks in ongoing negotiations, renewed trade friction adds caution to the policy outlook.
The real estate market presents another constraint. Data from the Korea Real Estate Board show that apartment prices in Seoul have risen for 55 consecutive weeks, although the pace of increase has slowed recently. A central bank survey indicated that the consumer expectation index for home prices fell to a three-and-a-half-year low in February. The South Korean government plans to accelerate construction of approximately 60,000 housing units in the Seoul metropolitan area starting as early as 2027, as part of a broader commitment to build about 1.35 million homes nationwide by 2030. However, supply-side measures will take time to have an effect. The central bank has repeatedly warned that loose financial conditions could reignite borrowing demand and worsen household debt. January meeting minutes noted that loan growth has been contained under stricter supervision, but strong price expectations in the capital region may continue to exert upward pressure on leverage.
External conditions also support a cautious stance. The U.S. Federal Reserve held rates steady in January after three consecutive cuts, citing stabilizing labor market conditions. However, meeting minutes revealed divisions among U.S. policymakers, with some suggesting that rates may need to stay higher for longer if inflation persists. Given the impact of the Fed’s interest rate path on yield spreads and the won’s movement, the Bank of Korea is likely to remain highly sensitive to U.S. policy developments.
Overall, stable inflation, strong semiconductor exports, and ongoing financial stability risks have placed the Bank of Korea in a wait-and-see mode. This stance is unlikely to change unless the economy shows clear signs of slowing or price pressures reemerge.
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