The Bank of Korea (BOK) is widely expected to maintain its key policy rate at 3.25% this week to bolster the Korean won amid the US dollar's recent surge, according to a Reuters poll.
Approximately 90% of the 38 economists surveyed between Nov 18 to 25, anticipate the central bank will keep rates steady on Thursday. Only four forecast a 25-basis-point cut.
This pause in the easing cycle, which began just last month, comes as the won has depreciated 2% in November. Analysts attribute this to concerns over inflationary pressures from US President-elect Donald Trump's policies and the intensified Russia-Ukraine conflict.
Jun-yeong Kim, economist at DS Investment and Securities, highlighted the BOK's caution, citing "heightened FX volatility" due to what is termed "Trump trade" and the Federal Reserve's hawkish stance.
While inflation remains below the 2% target and the economy faces challenges after narrowly avoiding recession, analysts believe the BOK will delay rate cuts until the won stabilises around the mid-1,300s against the dollar.
The won broke through 1,400 per US dollar this month for the first time since April. Expectations of continued dollar strength in 2025 suggest fewer rate cuts in South Korea than in the US, with Reuters polls projecting a 75-basis-point reduction by the BOK next year, compared to a full percentage point by the Federal Reserve.
Forecasts for South Korea's interest rates were revised to three 25-basis-point cuts in January-September 2025 from two cuts predicted earlier. Analysts cited risks to growth in an economy burdened by one of the world's highest household debt levels.
Among 25 economists who provided year-end projections, two-thirds foresee rates ending 2025 at 2.50% or lower, the central bank's neutral rate, while eight anticipate rates at 2.75% or higher.
"Current monetary policy settings are still restrictive and further rate cuts are likely," said Krystal Tan, economist at ANZ. She added that the slowing pace of household debt and housing price growth may offer the BOK some comfort in implementing these cuts.
Some economists anticipate the BOK may revise its 2025 economic growth forecast, currently at 2.1%, reflecting heightened risks.
