BOK Trapped Between Narrowing Rate Gap and Won, Housing Concerns

The Bank of Korea faces growing pressure as the U.S. Federal Reserve cut its benchmark interest rate for the third consecutive time.

While the U.S. has signaled additional rate cuts next year, experts say the BOK will find it difficult to lower rates for the time being due to unstable factors including the real estate market. Typically, U.S. rate cuts put downward pressure on the won-dollar exchange rate (strengthening the won), but recent market uncertainty has increasingly led to short-term forecasts missing the mark.

The won closed at 1,473.0 per dollar on the Seoul foreign exchange market Wednesday, up 2.6 won from the previous day. The currency initially fell to 1,463.9 won in early trading, tracking dollar weakness following the Fed's rate cut, but rebounded to 1,473.9 won as bargain hunters entered the market.

Analysts largely attribute the limited decline in the exchange rate to persistent dollar buying demand and mixed market interpretations of the Fed's future rate-cut pace. Global investment banks in particular noted the phrase "timing and magnitude" included in the Federal Open Market Committee statement, forecasting that the Fed's rate-cutting pace could slow more than expected.

"There were expectations for the exchange rate to fall after the Fed's decision, but the decline was limited as next year's Fed rate-cut outlook was also factored in," BOK Governor Rhee Chang-yong said Wednesday.

Experts believe that even if the Fed cuts rates further, the stabilizing effect on the won-dollar exchange rate will be limited. They point to structurally elevated dollar demand driven by domestic investors' expanding overseas investments and increased U.S. investment by the government and corporations.

Inflation trends are also complicating the BOK's choices. Consumer prices rose 2.4 percent year-on-year for the second consecutive month. Governor Rhee noted that "if the won-dollar exchange rate remains at current levels, prices could rise an additional 0.2 percentage points next year." He explained that the longer the high exchange rate persists, the more entrenched upward pressure on prices becomes.

Persistently high housing price expectations also constrain rate cuts. Further lowering the benchmark rate could reignite overheating in the housing market, which would restrict household spending capacity while increasing financial stability risks.