The Bank of Korea continues its dovish stance: maintains interest rates unchanged and downplays the expectation of a rate cut in November

According to the Zhitong Finance APP, the Bank of Korea has maintained its policy settings and indicated a continued inclination towards further easing, despite attempts to downplay recent expectations for interest rate cuts. On Thursday, the Bank of Korea kept the seven-day repurchase rate at 2.5%, with one member voting against it, the same number of dissenting votes as in the last meeting in August. This decision aligns with the expectations of 23 out of 25 economists surveyed. This move continues the pause in rate hikes that began in July, following four rate cuts since October of last year.

Governor Lee Chang-yong stated at a post-meeting press conference that it is currently unclear whether conditions for a rate cut will be met at the next policy-setting board meeting on November 27. He noted that four out of six members are willing to cut rates within the next three months, down from five at the last meeting.

Lee Chang-yong mentioned that the forward guidance shifted from "5 in favor - 1 against" to "4 in favor - 2 against," reflecting greater concern for financial stability. The inclination towards easing remains, but it can be said that the scale and timing of potential rate cuts have been adjusted.

Following Lee Chang-yong's remarks, the Korean won depreciated, falling to around 1,441 won per dollar in early afternoon trading, the weakest level since April; the Korean stock market reversed from gains to losses, and the yield on three-year government bonds rose.

Some economists indicated that this change suggests policymakers are becoming more cautious about the pace of easing. Barclays economist Bumki Son stated that considering a potential export-driven growth recovery next year, the Bank of Korea may only cut rates once more in the current cycle.

"Given that the board did not cut rates this time, the timing adjustment seems natural; and assuming the current situation persists, the potential magnitude of rate cuts may also see some adjustment, as it may be more difficult for the board to reach a consensus," Bumki Son added.

As the Korean real estate market continues to rise, policymakers have signaled caution. As of October 13, apartment prices in the capital have risen for 37 consecutive weeks, despite a series of government measures aimed at curbing demand. Data for the latest week will be released later on Thursday.

"Regardless of whether there is a bubble in the real estate market, housing prices in the Greater Seoul area are at excessively high levels relative to national income and social stability," Lee Chang-yong said.

Policymakers are concerned that the continued rise in the real estate market and increasing mortgage debt levels may exacerbate financial instability.

Economist Hyosung Kwon stated, "We expect the Bank of Korea to leave room for further rate cuts—under the baseline scenario, a rate cut may be restarted in November, depending on whether the household loan restriction measures introduced on October 15 can effectively cool the real estate market."

Economists have differing views on the future policy path of the Bank of Korea: some believe the rate-cutting cycle has ended, while others expect easing to resume once real estate risks are alleviated. Citigroup believes that given the pressures on housing prices and exchange rates, the current benchmark rate will remain at 2.5%; while Morgan Stanley expects the Bank of Korea to cut rates in November as new housing restriction measures take effect.

Data from the Bank of Korea shows that household credit growth slowed to 2% last month, the lowest level since March, while mortgage growth was at 2.5%. This divergence highlights the challenges faced by policymakers: stimulating growth while avoiding exacerbating leverage related to real estate The South Korean government launched a new round of housing restriction measures last week, aimed at cooling housing prices in the Greater Seoul area. The measures include tightening mortgage limits based on property value, expanding the scope of regulatory areas, and accelerating the timeline for increasing the risk weights of bank housing loans. Authorities stated that these initiatives are intended to guide credit away from real estate and prevent excessive capital inflow into the housing sector.

Inflation remains close to the central bank's target of 2%, creating space for easing policies if other conditions permit. In September, consumer prices rose 2.1% year-on-year, accelerating from 1.7% in August, due to the expiration of temporary reductions in telecommunications fees. Core inflation increased by 2% year-on-year. Policymakers indicated that underlying price pressures remain under control.

Economists are closely monitoring export performance, as U.S. tariffs have begun to impact key export products such as automobiles. Trade negotiations between South Korea and the U.S. remain stalled, with both sides working to finalize the details of a $350 billion investment commitment related to maintaining the tariff cap on South Korean goods at 15%.

The Bank of Korea estimates that U.S. tariffs will drag down economic growth by 0.45 percentage points this year and by 0.6 percentage points in 2026. In August, the bank raised its growth forecast for this year from 0.8% in May to 0.9%, which is also roughly in line with the International Monetary Fund's forecast earlier this month.

Authorities also need to closely monitor the Federal Reserve's dynamics, as any divergence in policy trajectories could trigger exchange rate fluctuations.

"Since August, concerns about the exchange rate have intensified, and committee members who are more sensitive to exchange rate changes may find it difficult to advance easing if such situations persist," said Bumki Son from Barclays