South Korea’s central bank, the Bank of Korea, has decided to maintain its benchmark interest rate at 2.5 percent, citing a stable inflation path and modest signs of improvement in domestic demand. The decision, announced on Thursday, was widely expected, as the bank aims to balance the need to support economic growth with concerns over high house prices and uncertainty surrounding the US-China trade negotiations.
The country’s economy grew more than expected in the second quarter, driven by strong demand for semiconductors, which propelled exports to their largest gains in nearly five years. The Bank of Korea has revised its growth forecast for this year upward to 0.9 percent from 0.8 percent in May, reflecting the positive trend in exports and domestic demand. However, the bank warned that the impact of US tariffs could gradually weaken export growth.
The US tariffs, which were initially set at 25 percent, were reduced to 15 percent after South Korea agreed to make significant investments in the United States. Despite this agreement, the Bank of Korea cautioned that the future growth path remains uncertain, due to factors such as US-China trade negotiations, product-specific tariffs, and the pace of domestic demand recovery.
Bank governor Rhee Chang-yong indicated that the current rate-cut stance is likely to be sustained until the first half of next year, due to weak growth. The recent summit between US President Donald Trump and South Korea’s President Lee Jae Myung, which resulted in major investment plans by South Korean companies in the United States, was seen as a positive development by the Bank of Korea.
The decision to hold interest rates steady reflects the bank’s efforts to navigate the complexities of the current economic landscape, including the ongoing trade tensions between the US and China. As the Bank of Korea continues to monitor the situation, it is likely to maintain a cautious approach to monetary policy, balancing the need to support growth with the need to manage inflation and financial stability. The bank’s next move will be closely watched, as it seeks to steer the economy through a period of uncertainty and potential risks.
