Bank of Korea holds rates amid growth risks

The Bank of Korea’s Monetary Policy Committee on Jan. 15 kept its benchmark interest rate at 2.5 percent. This marks the fifth consecutive hold since the central bank cut the rate by 0.25 percentage points from 2.75 percent in May last year. In its policy statement, which signals future monetary moves, the bank even removed any mention of potential rate cuts. Analysts interpret this as the end of the rate-cutting cycle that began in October 2023.

The bank cited persistently high risks related to housing prices in the Seoul metropolitan area, household debt, and currency volatility as reasons for maintaining rates. According to the Korea Real Estate Board, average apartment prices in Seoul have risen for 48 consecutive weeks since February last year. Apartment sales, which had slowed after the “10-15 Real Estate Measures” imposed triple regulations on Seoul and parts of Gyeonggi Province, are rising again. The won-dollar exchange rate also climbed within a day, despite an unusual verbal intervention by U.S. Treasury Secretary Scott Bessent warning that a weaker won does not align with South Korea’s strong economic fundamentals.

To curb rising import prices driven by a weak currency, the Bank of Korea would need to raise interest rates above those in the United States, which are currently 1.25 percentage points higher. Doing so, however, would risk dragging down economic growth, which is projected at 1.8 percent this year. Conversely, cutting rates to ease soaring youth unemployment, now at 6.1 percent, and to support struggling self-employed workers could trigger another surge in home prices and accelerate household debt. As a result, analysts expect the central bank to keep rates unchanged for the time being.

South Korea’s economy faces this policy bind largely because of widening disparities between fast-growing sectors and lagging ones, a pattern often described as K-shaped growth. Industries benefiting from the artificial intelligence boom, including semiconductors, are posting strong results and paying sizable bonuses. By contrast, struggling sectors such as petrochemicals and steel have been largely left out of the recovery. Even as the KOSPI nears 4,800, only about half of retail investors have posted gains, while rising property prices remain concentrated in select areas, deepening wealth inequality.

In this environment, lifting overall growth and spreading gains beyond a handful of sectors is a daunting task for any government. One-off fiscal measures, such as last year’s 13 trillion won economic relief package, tend to deliver only short-lived effects. Policymakers need to make employment systems more flexible so companies can hire young workers with fewer constraints and expand support for artificial intelligence transition investments to improve overall economic efficiency.