The Bank of Korea keeps policy rate unchanged as expected to assess the impact of consecutive rate hikes; Governor’s remarks may signal future policy direction

According to news from Zhitong Finance APP, the Bank of Korea announced on Thursday that it would keep the seven-day repo rate unchanged at 3%, in line with market expectations. After raising rates by 25 basis points each in July and August—a move driven by an unprecedented semiconductor-fueled economic boom that sought to rein in inflation and marked the bank's first consecutive hikes in over three years—the Bank of Korea has opted to pause further increases to assess the impact of higher borrowing costs.

Following the rate decision, the exchange rate of the Korean won against the US dollar remained at 1,325.85 won per dollar, maintaining its earlier 0.1% gain. The yield on South Korea’s three-year government bonds, which is sensitive to monetary policy, also held steady at 3.81%, down by 1 basis point.

This decision to hold rates reflects the desire of policy makers at the Bank of Korea to allow time to evaluate how households and businesses are responding to previous rate hikes. Bank of Korea Governor Rhee Chang-Yong previously stated that after the August hike, the central bank would adopt a gradual approach to further increases. However, the bank has pledged to maintain a restrictive monetary policy until it is confident that inflation will return to the 2% target level.

Currently, market attention has shifted to Rhee Chang-Yong’s press conference at 11:10 am Seoul time, to look for clues on whether the Bank of Korea might resume rate hikes in November. He will explain the Monetary Policy Committee’s reasoning behind its latest rate decision and further elaborate on his expectations for future policy direction.

Jeeho Yoon, an economist at BNP Paribas, said: “I expect the Bank of Korea will implement the last rate hike of this cycle in November.” He projects that the terminal rate will reach 3.25%. Yoon added, “Ultimately, the key focus of today’s meeting is how financial markets will assess the likelihood of a November hike by the Bank of Korea after today’s decision.” He also noted that there remains a risk of an additional rate hike even after that.

The median forecast for interest rates published by the Bank of Korea's policy committee in August for the next six months is 3.25%, signaling that there is room for another 25-basis-point hike.

Inflationary pressure is a key reason supporting further rate hikes by the Bank of Korea. Although South Korea’s September Consumer Price Index (CPI) rose by 2.9% year-on-year, down from 3.1% in August, and the core inflation rate—excluding the volatile food and energy components—fell from 3.4% to 2.8%, both measures remain significantly above the central bank’s 2% target. With strong semiconductor exports, gradually recovering domestic demand, and persistently high energy costs all combining, underlying price pressures are expected to stay robust. Rhee Chang-Yong previously warned that persistent cost pressures and strengthening demand will keep inflation elevated for some time.

Meanwhile, the real estate market remains another reason for policymakers to stay cautious. Although the growth of banks’ household loans has slowed, apartment prices in Seoul have risen for 88 consecutive weeks, keeping property market risks firmly in the Bank of Korea’s spotlight.

The appreciation of the Korean won also provides additional justification for a gradual approach to policy tightening, as a stronger won helps suppress imported inflation. Rhee Chang-Yong stated last week that further appreciation of the won would be ideal, emphasizing that it would bolster household purchasing power and benefit sectors that have lagged behind the semiconductor-driven economic expansion.

Beyond the traditional dual objectives of inflation and growth, financial stability risks are becoming a more important consideration in the Bank of Korea's decision-making. Recently, volatility in Korea’s capital markets has intensified. The KOSPI index fell to a six-month low last Thursday and triggered this year's tenth circuit breaker. If the stock market correction continues, it could also affect the pace at which the Bank of Korea tightens monetary policy. This means that while fundamentals support further rate hikes, the fragility of financial markets could materially constrain the tightening path.