Central Bank stands pat in February

Decision in line with market expectations: At its meeting on 26 February, the Bank of Korea (BOK) decided to keep the base rate unchanged at 2.50%. The decision was in line with market expectations and marked the sixth successive hold after May’s 25 basis point cut.

Stable inflation and GDP growth drive decision: The BOK cited stable inflation and solid GDP growth in recent months as the main drivers of the hold. It also raised its 2026 forecasts for economic growth and inflation to reflect a faster-than-expected expansion in the AI sector, reinforcing its wait-and-see stance. Still, inflation is expected to remain close to the Bank’s 2.0% target.

Bank likely to leave rate unchanged this year: The Bank of Korea introduced near-term guidance in the form of a dot plot. The median dot points to no change in the policy rate over the next six months, though the distribution indicates a slightly dovish tilt. Of the 21 dots, 16 were at 2.50%. Governor Rhee said the four dots signaling a 25-basis-point cut likely reflect the widening gap in performance between tech and non-tech sectors, as well as expectations of further stabilization in the foreign-exchange and real estate markets. In line with this, most of our panelists expect the Bank to stand pat throughout 2026. Still, the U.S.-Iran conflict is key to monitor, as South Korea imports about 70% of its crude oil from the Middle East. The country holds ample energy reserves, and strong exports could help soften the pass-through from higher energy costs via increased government revenue. Even so, the prolonged closure of the Strait of Hormuz remains an upside risk.

Panelist insight: ING’s Min Joo Kang said: “We expect BoK to resume its rate hikes in 2027. Macroeconomic conditions -- such as growth above potential and firm inflation -- could justify hikes even earlier, perhaps in the fourth quarter. As we expect GDP to grow 2.2% in 2026, stronger than the BoK's own estimation, the negative output gap may close as early as end of 2026. However, a K-shaped recovery is expected to continue, as the imbalance between the IT and non-IT sectors widens. This should limit the risk of earlier-than-expected BoK hikes. In addition, it is also important to consider financial stability. The government tightened housing rules, which are expected to stabilise housing prices in Seoul. The data will be confirmed around June/July.”

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