SEOUL, Feb 23 (AJP) - The Bank of Korea is widely expected to keep its benchmark interest rate unchanged on Thursday, hemmed in by political uncertainty abroad, domestic financial imbalances and a governorship nearing the end of its term.
Since cutting rates to 2.5 percent in May last year, the BOK has remained on hold. That pause reflects a series of overlapping constraints: political turbulence triggered by impeachment fallout, renewed U.S. trade pressure, inflation risks from a weak won, and asset inflation driven by overheated housing and equity markets.
Each factor alone would complicate policymaking. Together, they have produced near paralysis.
The signal was formalized in January.
At its Jan. 15 meeting, the BOK removed all references to possible “rate cuts” from its policy statement, shifting to explicitly neutral language. The move effectively closed the door on near-term easing and signaled that the policy cycle had entered a holding phase.
Governor Rhee Chang-yong’s four-year term ends on April 20. While an extension is possible, markets remain cautious about any major shift during the transition period.
For now, investors are pricing in upside risk rather than easing.
The 10-year government bond yield, which peaked at 3.754 percent on Feb. 9, has retreated to around 3.58 percent, but remains nearly 100 basis points above the policy rate — a gap that continues to strain highly leveraged households.
External pressures are adding to the bind.
South Korea is grappling with persistent capital outflows and a structurally weak currency. As of December 2025, outbound investment by residents reached $14.37 billion, almost triple foreign inflows of $5.68 billion.
Although the won briefly strengthened this week on a weaker dollar and renewed uncertainty over U.S. trade policy, it remains anchored near the 1,440-per-dollar level — a reflection of underlying vulnerability.
That weakness limits the BOK’s ability to cut rates without risking further capital flight.
The appointment of Kevin Warsh as the next Federal Reserve chair has added another layer of complexity. Known for advocating both monetary tightening and selective easing, Warsh embodies a policy mix that could destabilize global rate expectations.
For Seoul, this creates an uncomfortable scenario in which both tightening and easing pressures coexist — making abrupt policy moves increasingly risky.
Regional dynamics are also shifting.
The Bank of Japan has steadily raised rates since exiting its zero-rate era in 2023, lifting its benchmark to 0.75 percent by last December.
Although Tokyo paused in January pending wage data, major institutions expect further hikes.
“We can expect as many as three rate increases this year,” said Kenya Koshimizu of Mizuho Financial Group, in comments to Reuters.
As Japan normalizes policy, Korea’s interest-rate differential is narrowing — reducing Seoul’s flexibility to cut without undermining currency stability.
At home, household debt remains the central obstacle.
According to BOK data, total household credit reached 1,852.7 trillion won ($1.28 trillion) at the end of 2025, rising 11.1 trillion won from the previous quarter despite tighter lending rules and mortgage caps.
More troubling is the shift in borrowing patterns.
Lending by non-bank financial institutions jumped to 4.1 trillion won in the fourth quarter, more than double the previous quarter’s level. As borrowers migrate toward higher-cost credit, financial fragility is increasing.
In this environment, even a modest rate cut could be interpreted as an invitation to re-leverage — precisely the signal policymakers want to avoid.
Analysts view the January statement as decisive.
“The BOK effectively signaled the end of the easing cycle,” said Cho Yong-gu of Shinyoung Securities. “With overheated asset markets and rising debt, a rate cut is highly unlikely.”
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