Woori Financial Research Institute Expects 25bp Rate Cut and Shift to Neutral Stance at November MPC Meeting

Negative Growth Gap Expected Next Year
Further Rate Cuts Needed
Aiming to Stabilize Bond Market Yields

Woori Financial Research Institute Homepage

Woori Financial Research Institute has forecasted that the Bank of Korea will lower the base interest rate by 25 basis points (1bp = 0.01 percentage points) at the Monetary Policy Committee meeting in November. This projection is based on the view that there is now room for a rate cut, following measures to curb the excessive surge in market interest rates in the bond market and the strengthening of real estate lending regulations.

Heo Moonjong, Head of the Management Strategy Center at Woori Financial Research Institute, stated in the "November Financial Market Brief" report, "The Bank of Korea is expected to lower the base rate from 2.50% to 2.25% in November." He further added, "Reflecting the need for growth improvement and financial stability, the Bank is likely to shift its policy stance from easing to neutral, for example, by removing the phrase 'the timing and scale of further cuts will be decided' from its statement."

The main reason cited for the likelihood of a rate cut by the Bank of Korea is "growth." This is because the domestic economic growth rate is expected to maintain a "negative gap" (falling short of the potential growth trend).

In August, the Bank of Korea projected this year's economic growth rate at 0.9%. With a "surprise" third-quarter growth of 1.2%, the annual growth rate for this year is now likely to reach 1%. Even if the Bank of Korea raises its 2026 growth forecast to the upper 1% range, the negative gap is expected to persist, suggesting that the need for further rate cuts remains valid. In addition, although the Korea-US trade negotiations resulted in tariffs on certain items, such as automobiles, being reduced from 25% to 15%, this is still significantly higher than the previous rate (0%), and is expected to weigh on exports next year. Previously, the Bank of Korea estimated that US tariff policies would lower Korea's GDP growth rate by 0.6 percentage points in 2016, based on a tariff rate of 15% at that time.

Lee Changyong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul. 2025.08.28 Photo by Joint Press Corps

The explicit mention of "the timing and scale of further cuts will be decided" in last month's Monetary Policy Committee statement was also cited as a factor increasing the likelihood of a rate cut. Woori Financial Research Institute explained, "In the past, when rate cut signals were included in policy statements and four or more committee members expressed conditional support for a rate cut within three months in the forward guidance, an actual cut was implemented." Previously, four committee members had expressed support for a cut in the forward guidance. Therefore, even if a rate cut is implemented in January, it would not contradict the monetary policy signals.

The situation in the bond market also appears to have been taken into account. Recently, market interest rates in the bond market have remained at high levels. The Bank of Korea's decision to keep the base rate unchanged has increased uncertainty in monetary policy, which is believed to have pushed bond yields higher.

Woori Financial Research Institute stated, "We expect that a base rate cut in November will help curb the excessive surge in market interest rates, thereby supporting domestic demand recovery and indirectly backing productive finance." If the current high interest rates persist, there is a possibility that the momentum for domestic demand recovery-especially among self-employed individuals and small and medium-sized enterprises-could be constrained. In particular, with an expansionary fiscal stance and an expected increase in bond supply related to initiatives such as the National Growth Fund next year, a surge in market interest rates could become a burden for raising funds needed for productive finance.

Finally, the strengthening of real estate regulations was also cited as a factor that has eased the burden of a rate cut. Woori Financial Research Institute assessed, "With the tightening of macroprudential regulations, such as total loan management and measures to suppress housing demand, the risk of a sharp increase in household debt and a renewed rise in housing prices due to a rate cut has been reduced."