Bank of Korea to cut rates two more times in 2025: BofA

The Bank of Korea (BOK) maintained its benchmark monetary policy rate at 2.50% on July 10, signaling a steady stance. While BofA economists anticipate two rate cuts in the second half of 2025 as a base case, they note an earlier reduction, potentially in August, could occur if Seoul housing prices stabilize. Financial markets are currently pricing in approximately 11 basis points of cumulative rate cuts for the remainder of 2024, indicating expectations for modest easing as the BOK navigates economic growth and housing market stability.

Analysis

The Bank of Korea (BOK) maintained its policy rate at 2.50% on July 10, signaling a continued cautious stance. However, forward-looking guidance from both analysts and markets suggests a dovish tilt is on the horizon. Bank of America economists forecast a base case of two rate cuts in the second half of 2025, but have identified a crucial condition for earlier action: a rate reduction could occur as soon as the August meeting if housing prices in the Seoul region stabilize. This explicitly links near-term monetary policy to the real estate market. Financial markets reflect this potential for a near-term move, having priced in approximately 11 basis points of cumulative cuts for the remainder of 2024. This market pricing indicates a tangible, though not fully committed, expectation for easing before year-end, underscoring the BOK's ongoing challenge of balancing economic growth objectives with housing market stability.

Key Decisions for Investors

• Investors should closely monitor upcoming housing price data for the Seoul metropolitan area, as stabilization in this sector is the primary catalyst identified for a potential Bank of Korea rate cut as early as August.
• Given that markets are pricing in a modest 11 basis points of easing for the remainder of 2024, any data confirming housing market stability could trigger a bullish repricing in South Korean rate-sensitive assets, such as government bonds and certain equities.
• It is prudent to consider the risk that if housing prices do not cool, the BOK may delay its easing cycle into 2025, which would disappoint current market expectations and could negatively impact positions built on the assumption of a near-term rate cut.