Bank of Korea Sets 2026 Rate Cut Conditions, Hinging on Inflation, Growth, and Financial Stability

Will your borrowing costs fall next year? The Bank of Korea (BOK) has laid out its conditional roadmap for further interest rate cuts in 2026, signaling that any decision will be a tightrope walk between three key variables: inflation, economic growth, and financial stability.

In its monetary policy guidelines for next year released on December 25, the BOK stated it will "determine whether and when to make additional rate cuts based on a comprehensive assessment of incoming data," according to Yonhap News Agency. The central bank has held its key rate steady at 2.5% for four consecutive meetings through last month, after a monetary easing cycle that began in October of last year saw rates lowered by a cumulative 100 basis points from 3.5%.

The Three Barometers for Rate Cuts

The BOK's policy direction hinges on a delicate balance. First is inflation. While expected to hover around the target level, the bank warned that upward pressures from an elevated exchange rate and recovering domestic demand could be stronger than anticipated. Second is economic growth. The economy is projected to expand 1.8% in 2026, up from this year's 1.0% forecast, but the outlook is clouded by risks from the global trade environment, the semiconductor cycle, and the pace of domestic recovery.

The final variable is financial stability. The bank called for "continued vigilance" over housing prices in Seoul, household debt, and the effects of high exchange-rate volatility. This suggests a concern that premature rate cuts could reignite problems in the property market and exacerbate already high levels of household debt.

Defending the Won and Market Stabilization

In response to the won's recent volatility, the BOK pledged to act decisively. It plans to "strengthen market monitoring and actively implement market stabilization measures to address excessive herd behavior." The central bank also aims to bolster foreign investor access by seeking to extend maturing currency swap agreements and introducing institutional improvements, such as 24-hour trading in the FX market.