South Korea Faces Inflation Challenges: Central Bank Maintains Rates Despite Ongoing Pressures

South Korea's Inflation Holds Steady Amid Economic Pressures

In November, South Korea's annual inflation rate remained at 2.4%, mirroring the previous month's figure and surpassing market expectations. Ongoing increases in the prices of food, energy, and housing continue to strain the economy.

The Bank of Korea (BOK) is navigating a challenging environment. Although core inflation is approaching the central bank’s 2% target, policymakers have chosen to keep the benchmark interest rate at 2.5% for the fourth straight meeting. This move signals a pause in rate reductions, reflecting concerns over a weakening won and persistent inflation risks. The decision highlights the difficulties of supporting a fragile recovery, as both a soft currency and subdued domestic demand threaten to keep price pressures elevated.

Factors Driving Stubborn Inflation

Several underlying and external factors are contributing to the inflation plateau. The depreciation of the South Korean won has increased the cost of imports, prompting businesses to pass these higher expenses on to consumers in the form of more expensive groceries, fuel, and electronics. The government’s decision to end fuel-tax subsidies in October has further raised transportation and logistics costs, sectors heavily dependent on fuel. Additionally, severe weather events—including storms and heavy rainfall—have disrupted the supply of agricultural and fishery products, leading to higher prices for essential items.

Finance Minister Koo Yun Cheo has pointed out that these weather-related supply disruptions and shortages have significantly pushed up the cost of processed foods, adding to the financial burden on households.

Housing Market Adds to Inflation Concerns

Seoul’s real estate market is further complicating the inflation outlook. Apartment prices have climbed for 43 weeks in a row, and officials warn that continued low interest rates could encourage speculative buying. Rising property values not only make living more expensive for residents but also drive up costs for businesses, perpetuating inflationary trends.

Reflecting these ongoing risks, the BOK has raised its inflation forecast for 2025 to 2.1%, up from the previous estimate of 2%. Governor Rhee Chang Yong has emphasized that the sluggish recovery of the won remains a significant obstacle.

Global Trade and Geopolitical Influences

International factors are also shaping South Korea’s inflation landscape. In November, the country’s trade surplus expanded to $9.73 billion, fueled by a 39% year-on-year jump in semiconductor exports to $17.26 billion. While this growth benefits the technology sector and the broader economy, it has also led to increased competition for raw materials, pushing up production costs.

The recent U.S.-South Korea trade agreement, which took effect on November 1, reduced American tariffs on Korean goods to 15%. This change offers relief to exporters but complicates inflation management, especially as domestic demand remains robust.

Policy Challenges and Outlook

The BOK’s policy path is complicated by differing opinions among its Monetary Policy Board members. While some advocate for maintaining current rates to protect against currency volatility, others support cautious rate cuts to boost growth amid global uncertainty. This division underscores the broader challenge of balancing inflation control with economic recovery, particularly as the U.S. Federal Reserve’s upcoming rate decision could impact global capital flows and exchange rates.

Looking forward, the direction of South Korea’s inflation will depend on factors such as external demand, currency movements, and domestic policy choices. A stronger won could help ease import costs, but ongoing structural changes—like increased overseas investment and a shift toward capital-intensive industries—suggest that currency weakness may persist. For now, the BOK’s careful approach appears to match market expectations as policymakers tread carefully to avoid reigniting inflationary pressures.