Bank of Korea Cuts Key Rate for First Time in 3 Years, Pivots to Growth
The Bank of Korea cut its benchmark interest rate by 25 basis points to 3.25%, the first reduction in over three years, as it shifts its focus from inflation to supporting economic growth.
South Korea's central bank cut its benchmark interest rate for the first time in over three years, a decisive pivot from its long-standing fight against inflation to supporting a rapidly slowing economy. The move signals a new phase in monetary policy, but officials were quick to temper expectations of an aggressive easing cycle.
A Data-Driven Shift
The Bank of Korea’s Monetary Policy Committee lowered its policy rate by 25 basis points to 3.25% on December 23, 2025, it announced in a statement. The decision, which ends a streak of 11 consecutive holds, was driven by mounting concerns over economic growth. The central bank recently downgraded its GDP growth forecast for next year to 1.8% from a previous estimate of 2.1%.
The pivot was enabled by stabilizing inflation. November's consumer price index (CPI) came in at 2.5%, marking the second straight month it has remained within the BOK's target range. Governor Rhee Chang-yong said the decision "reflects our confidence that inflation is on a firm path back to our target, allowing us to shift focus toward supporting growth."
A Cautious Outlook
Despite the cut, Governor Rhee struck a cautious tone, warning investors not to get ahead of themselves. "This is not the beginning of an aggressive easing cycle," he told reporters. "We will proceed cautiously, monitoring data."
His caution is reflected in the board's vote, which was a 5-2 split, with two members preferring to keep the rate on hold. This internal dissent suggests a high bar for subsequent cuts. Analysts at KB Securities are divided, with some forecasting another cut in the first quarter of 2026 while others see the possibility of a prolonged pause.
The BOK's pivot provides a tailwind for South Korean equities and the won. However, the cautious guidance and split vote suggest the easing cycle will be shallow and data-dependent. This is a 'hawkish cut' designed to support growth without stoking inflation or debt, capping immediate market euphoria.
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