The Bank of Korea announced its plan to implement further interest rate cuts next year to alleviate downward pressure on growth. However, the speed of reduction will be determined by observing the impact of interest rate cuts on financial stability and the development of domestic and international risk factors.
In its '2025 Monetary and Credit Policy Direction' released on the 25th, the Bank of Korea noted, "Given that the inflation rate is expected to maintain a stable trend, the increase in political uncertainty, intensifying global competition in key industries, and changes in the trade environment have all been considered in expanding the downside risk to the economy."
The Bank of Korea maintained the benchmark interest rate at 3.5% from January to September this year, but cut the rate by 0.25 percentage points consecutively in October and November. This decision was influenced by a drop in the consumer price inflation rate to the 1% range year-on-year since September and the U.S. Federal Reserve (Fed) also lowering rates, creating conditions for a shift in monetary policy.
The Bank of Korea said, "The future pace of interest rate cuts will be determined flexibly by closely examining the unfolding of domestic and international risk factors, their impact on price and growth trends, and financial stability, as well as the trade-off relationships between policy variables," noting the necessity to be mindful of how changes in major countries' currency policies and domestic and international political uncertainties affect exchange rate volatility.
Regarding financial stability, the Bank of Korea plans to enhance early warning functions and implement market stabilization measures promptly when necessary. It will continuously review and supplement response plans by scenario and decide on the extension of ongoing market stabilization measures (irregular repurchase agreement purchases, expansion of RP trading target securities and institutions) based on market conditions.
In the foreign exchange sector, while closely examining risk factors, additional stabilization measures will be implemented in response to excessive volatility. The Bank of Korea will ensure adequate supply of foreign currency liquidity when necessary and will consider relaxing foreign exchange soundness regulations with the government. Efforts will continue to extend maturing currency swaps and to stabilize improvements in the foreign exchange market structure, such as activating transactions with foreign financial institutions (RFI).
The Bank of Korea also plans to improve the loan system. It will develop an information technology (IT) system and establish related regulations to utilize financial institutions' loan assets as eligible collateral for central bank loans. The legal framework and system will be continually improved to promptly provide liquidity to non-bank deposit-taking institutions when necessary. Mid- to long-term improvement plans will be reviewed to enhance the effectiveness of financial intermediation support loans.
The Bank of Korea also decided to improve related systems to enhance the effectiveness of currency policy. It will expand external communication by the Commissioners of the Monetary Policy Committee and improve conditional forward guidance, presenting interest rate forecasts within the next three months. The active promotion of converting the Korea Overnight Risk-Free Rate (KORF) into benchmark rates will also expand the transmission effects of currency policy in the short-term financial markets.
Additionally, to lay the foundation for introducing a Central Bank Digital Currency (CBDC), the Bank of Korea will conduct real transaction tests of institutional-use CBDC and deposit tokens in cooperation with the Financial Services Commission, Financial Supervisory Service, participating banks, and others. It also plans to conduct joint research with the Bank for International Settlements (BIS) and major countries on improving cross-border payment services using tokenization technology, such as the Agora project.