Although the base rate was cut by 100 bp (1 bp = 0.01 percentage point) from Oct. last year to May this year, the Bank of Korea said the boost to economic growth has not been large so far. Economic agents have closed their wallets as uncertainty has increased. Still, considering transmission lags and some easing of domestic and external uncertainty, the BOK judged that the effects of rate cuts can be expected from the second half of this year.
On the 11th, the BOK released these details through the report "A review of the macroeconomic and institutional sector-specific transmission effects of base rate cuts," included in the Currency and Credit Policy Report (Sep. 2025). The report analyzes, using gross domestic product (GDP), prices, and household and corporations micro data, the transmission impact of four 25-bp base rate cuts since Oct. last year.
According to the BOK, the base rate cuts so far have cushioned the slowdown in growth, but their effects have not fully materialized due to high domestic and external uncertainty and transmission lags.
In the BOK's model analysis, under average historical levels of uncertainty, a 100-bp base rate cut lifted this year's first- to fourth-quarter GDP by 0.08–0.27 percentage point. However, under the current high-uncertainty environment, the increase was 0.02–0.17 percentage point smaller. The BOK explained, "In times of high uncertainty, economic agents tend to delay consumption and investment, and interest rate sensitivity tends to decline."
The BOK expects rate cuts to lift Korea's economic growth rate from the second half of this year. Political uncertainty has eased after the domestic presidential election, and economic uncertainty has also lessened as the United States concluded tariff negotiations with major countries.
The transmission lag for rate cuts to affect growth is typically two to three quarters. The BOK projected that if the transmission of rate-cut effects returns to its historical average, growth could be raised by 0.27 percentage point over the next year.
Combining price transmission channels such as total demand, the exchange rate, and expectations, the BOK found that a 100-bp base rate cut affected the inflation rate by 0.1 percentage point. That is similar to the historical average.
The BOK said, "Inflationary pressure through the total demand channel was lower than in the past as the effects of boosting consumption and investment weakened amid high uncertainty." It added, "Inflationary pressure through the exchange rate channel is estimated to have increased due to persistently high exchange-rate volatility and heightened sensitivity in the foreign exchange market."
While the impact on prices was limited, base rate cuts appear to have spurred an increase in household debt. In a vector autoregression (VAR) analysis, the BOK attributed 26% of the rise in Seoul apartment prices in the first half of this year to interest rate factors. The remaining 74% is estimated to be due to other factors such as supply-demand, regulation, and sentiment.
The BOK expects housing prices and household debt in the greater Seoul area to slow due to the June 27 measures and the government's policy to expand the supply of dwellings. Even so, the BOK said, "The rate of increase in housing prices in the Seoul area remains high," adding, "There are also upside pressures from easier financial conditions and concerns over supply and demand, so it is necessary to watch further to determine whether a trend stabilization takes hold."
With the base rate cut, households reduced their interest burdens and increased household loans, but they did not increase consumption. Private consumption in the first quarter fell 0.1% from the previous quarter. The BOK explained, "Since June this year, economic sentiment has rebounded sharply and the growth in credit card spending has been rising," adding, "Micro data will gradually confirm increased consumption effects."
Corporations, like households, saw lower interest burdens and expanded borrowing, but no increase in investment was confirmed. Construction investment in the first quarter fell 3.1% from the previous quarter, and facility investment decreased 0.4% over the same period.
The BOK said, "We need to examine more closely the growth-boosting effects and financial stability impacts of the base rate cuts so far, and then decide on the timing and pace of additional rate cuts going forward."