Bank of Korea holds rate at 3.00%, weighs timing and pace of further increases

The Bank of Korea’s Monetary Policy Board kept its benchmark interest rate at 3.00% until its next policy decision. Growth remained strong, led by exports and investment, while inflation continued at around 3% and financial stability risks persisted. The board judged that heightened uncertainty surrounding the Middle East and major economies’ monetary and fiscal policies warranted a pause to assess domestic and external risks and the effects of two previous rate increases.

The bank said the global economy continued to expand at a solid pace, supported by resilient AI investment despite escalating Middle East tensions. Higher energy prices and supply chain disruptions were expected to keep inflation elevated for some time. Global long-term government bond yields rose sharply as inflation concerns and expectations of rate increases intensified, alongside concerns about fiscal sustainability and the supply of AI-related corporate bonds. The US dollar strengthened. Equity markets became more volatile amid concerns about slowing AI investment, despite continued strong earnings growth. The global outlook would depend on developments in the Middle East, AI investment prospects and monetary and fiscal policy changes in major economies, including the United States.

South Korea’s economy grew faster than expected as exports and investment remained strong. Employment increased moderately, mainly in services. The bank expected the semiconductor upswing to sustain robust export and investment growth, while improving incomes would gradually broaden the recovery in consumption. Growth this year and next was expected to substantially exceed the August forecasts of 3.3% and 2.9%, respectively. Uncertainty remained over the Middle East, the duration of the semiconductor expansion and its spillover into domestic demand, and changes in domestic and overseas financial conditions.

Consumer inflation and core inflation, which excludes food and energy, remained elevated in September at 2.9% and 2.8%, respectively. Short-term inflation expectations among households stayed in the upper 2% range. The bank expected inflation to remain above target for a considerable period as accumulated cost pressures continued to pass through and demand pressures gradually increased. Consumer and core inflation this year were expected to broadly match the August forecasts of 2.7% and 2.5%, respectively. Next year, both were expected to exceed the previous projections of 2.3% and 2.5%. The inflation outlook remained highly uncertain, depending on oil prices, exchange rates, the pace of the domestic demand recovery and the breadth of wage increases.

Volatility increased across South Korea’s financial and foreign exchange markets. The won strengthened considerably against the dollar despite broader US currency strength, helped by improved foreign exchange supply and demand associated with a large current account surplus. Government bond yields rose sharply as Middle East tensions worsened, oil prices climbed and overseas sovereign yields surged, before retracing much of the increase on expectations of improved domestic bond supply and demand conditions. Share prices fell sharply on concerns about weakening semiconductor profitability. Household lending declined as net repayments of other loans outweighed continued growth in housing-related lending, while housing price gains in the capital region accelerated again.

The board said it would assess growth while steering inflation toward its target over the medium term and remaining attentive to financial stability. It expected strong exports and investment, together with a broader consumption recovery, to sustain robust growth. Inflation was projected to remain above target for a considerable period as accumulated cost pressures passed through and demand pressures increased. The board also stressed the need to monitor financial imbalances linked to the capital region’s housing market and household debt. It would determine the timing and pace of further rate increases after closely assessing inflation, economic activity and financial stability.

All seven board members voted to keep the benchmark rate unchanged.