South Korea Hits Inflation Target, but Rate Cuts Look Unlikely as Won and Housing Risks Loom

South Korea ended last year with inflation almost exactly where its central bank wants it. That does not mean cheaper money is coming any time soon.

Inflation cools to target—on paper

Consumer prices rose 2.1% in 2025 from a year earlier, the slowest pace in five years and just above the Bank of Korea’s 2% medium-term target. In December alone, the consumer price index climbed 2.3% year-on-year and 0.3% from November, according to data released in late December by the National Data Office (formerly Statistics Korea).

The return of inflation to the low 2% range puts South Korea among the first major export-driven economies to unwind the post-pandemic price surge that pushed inflation to 5.1% in 2022. But rather than opening the door to a fresh round of rate cuts, the figures reinforce the central bank’s decision to hold its benchmark rate at 2.5%—and suggest its yearlong easing cycle is nearing an end.

The Bank of Korea signals a prolonged pause

At its Nov. 27 meeting, the Bank of Korea’s Monetary Policy Board kept the base rate unchanged at 2.5% for a fourth straight time, after delivering four quarter-point cuts between October 2024 and May 2025.

In its statement, the board said it was “appropriate to leave the Base Rate unchanged at 2.50%” while “uncertainty in the growth outlook continues, and risks to financial stability also remain.”

Governor Rhee Chang-yong said officials were not considering rate increases, but cautioned about how much further they could cut.

“We need to keep open the possibility of both an additional base rate cut and maintaining the current rate,” Rhee said.

He also highlighted the currency as a risk, noting that the won had “stayed weak and has been showing herd-like behaviour,” and warning that it could feed back into higher prices.

Why households still feel squeezed

The headline inflation rate masks sharp increases in staples. In December, prices of agricultural, livestock and fishery products rose 4.1% from a year earlier. Rice prices jumped about 18%, while apples rose nearly 20%, officials said.

Energy costs also climbed: petroleum products were up 6.1%, with diesel rising more than 10% and gasoline nearly 6%.

By contrast, measures of underlying pressure looked subdued. Core inflation excluding food and energy was 2% in December from a year earlier, while a broader index excluding agricultural and oil products rose 2.3%—levels the National Data Office described as stable.

That divergence helps explain why officials acknowledge elevated “perceived inflation” even as the overall index returns to target. Groceries, processed foods and fuel—items felt most directly in daily life—have risen faster than the broader basket, and a weaker won has raised the cost of imports.

The won and debt are keeping policy tight

After lifting its policy rate to 3.5% during 2022 and 2023, the Bank of Korea began cutting in late 2024 as growth slowed, lowering rates by a full percentage point to 2.5% by May 2025. A planned cut in January 2025 was delayed amid political turmoil and currency pressure.

Since July, the board has held steady, signaling that further easing would likely require a renewed growth slump or a deterioration in external conditions. In November, one member voted for a cut, but the majority backed a hold.

Exchange-rate constraint

The won has been among Asia’s weaker currencies over the past year. Official data show the central bank sold a net $1.75 billion in the foreign exchange market in the third quarter of 2025, marking a fourth consecutive quarter of intervention.

Bank staff have warned that if the won remains around 1,470 per U.S. dollar, inflation could stay in the “early-to-mid 2%” range rather than easing further. Cutting rates substantially could widen the gap with U.S. rates, risking capital outflows and renewed currency weakness.

Household debt and housing risk

An even larger constraint is domestic financial stability. South Korea’s household debt stood at about 92% of GDP at the end of 2024, among the highest ratios globally. Property-related borrowing alone amounted to roughly 105% of GDP, according to central bank data and local media.

Apartment prices in Seoul and surrounding areas have started climbing again despite tighter mortgage and anti-speculation rules. In a June speech, Rhee warned that “if we cut the base interest rate excessively, there is a high risk that it will lead to a rise in real estate prices.”

The jeonse rental system adds leverage: tenants often pay large lump-sum deposits—frequently financed with loans—instead of monthly rent, making many households highly sensitive to interest-rate shifts and housing-price moves.

The central bank’s financial stability reports have repeatedly flagged renewed increases in home prices and household loans as risks that could intensify if policy loosens further.

Exports strengthen the growth picture

Those vulnerabilities come alongside a stronger external backdrop. Trade figures released on Jan. 1 showed exports rose 3.8% in 2025 to a record $709.7 billion, crossing the $700 billion mark for the first time. December exports surged 13.4% from a year earlier, the seventh consecutive month of growth.

Semiconductors, about one-fifth of shipments, powered much of the rebound. Chip exports rose more than 20% last year, with December shipments up over 40%, fueled by demand tied to artificial intelligence and data center buildouts.

That export momentum helped pull the economy out of an early-year soft patch. After contracting 0.2% quarter-on-quarter in the first quarter of 2025, GDP grew 0.6% in the second quarter and about 1.2% to 1.3% in the third—its fastest pace in nearly four years—alongside firmer private consumption and investment.

The central bank projects growth of about 1% in 2025 and 1.8% in 2026, with inflation near 2.1% over the same period. The International Monetary Fund has offered a broadly similar view, noting that inflation is close to target and financial stability risks are manageable.

A new statistical agency draws scrutiny

South Korea’s inflation data is also under renewed attention. On Oct. 1, the government upgraded Statistics Korea into a new National Data Office under the prime minister’s office, part of a push to build a “data powerhouse” and strengthen governance after past controversies over economic statistics.

Supporters argue the change will improve coordination and integrity. Critics worry that centralizing authority over key indicators—such as inflation and unemployment—could raise concerns about political influence if official data diverge too sharply from public experience.

What comes next for rates

For now, investors and international institutions have largely welcomed South Korea’s rapid disinflation and the central bank’s cautious stance. Analysts expect at most one additional cut—potentially to 2.25% in early 2026—if global conditions allow. A prolonged pause is widely seen as more likely, especially if U.S. rates remain elevated and the won stays under pressure.

For households juggling mortgage or jeonse loan payments while paying more for groceries and fuel, the difference between 2.1% and 2% inflation may feel academic. The Bank of Korea has met its target on paper. Whether that translates into relief at the checkout line—and stability in the housing market—may determine how long policymakers can keep rates on hold.