The Bank of Korea will keep its key policy rate at 3.25% this week to support the Korean won against a strong U.S. dollar, according to a majority of economists in a Reuters poll who forecast at least three rate cuts next year.
Fears U.S. President-elect Donald Trump's policies will drive up inflation in the world's largest economy and the escalation of the Russia-Ukraine war have strengthened the dollar against most major currencies, including the won, which is down 2% this month.
That is expected to force the Bank of Korea to pause its easing cycle, which only started last month.
Despite inflation remaining below the 2% target since August and risks to an economy that narrowly avoided a recession last quarter, economists said the central bank would prefer to wait a few more months before restarting its easing cycle.
About 90% of economists, 34 of 38, surveyed between Nov. 18 and Nov. 25 forecast it will keep its base rate (KROCRT=ECI) unchanged at 3.25% on Thursday. Four expected a 25 basis point cut.
"The recent depreciation of the won and heightened FX volatility - exacerbated by what some are calling 'Trump trade' - have likely added to the Bank's caution," said Jun-yeong Kim, economist at DS Investment and Securities.
"The Federal Reserve's hawkish monetary stance has been reflected in interest rates globally, making the BOK even more hesitant to proceed with a rate cut," Kim said.
He said the central bank could shift its focus to growth concerns and consider rate cuts once the won stabilized in the mid-1,300s to the dollar.
Following its break through 1,400 this month for the first time since mid-April, and given expectations of more dollar strength next year, analysts expect the Bank of Korea to opt for fewer rate cuts than the Fed.
The latest Reuters polls suggest Korea's central bank cutting rates by 75 basis points next year while the Fed is expected to cut its rates by a full percentage point.
Analysts revised their forecasts for South Korea to three quarterly 25 basis-point cuts in January-September 2025 from two cuts forecast for the whole of 2025 in October poll amid risks to growth in an economy with one of the highest household debt levels globally.
Among the 25 economists who provided forecasts through the end of 2025, 17, or two-thirds, expected rates to finish next year at 2.50% - considered by the central bank as the neutral rate which neither stimulates nor restrains the economy - or lower.
Eight economists forecast 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.
"The pace of increase in household debt and housing prices has slowed. This pullback will provide some comfort to the BOK."
Some economists think the central bank will lower its economic growth outlook for next year from the current 2.1%, which matches the median forecast in a Reuters poll taken last month.
(Other stories from the October Reuters global economic poll)
