The Korea–US interest rate gap has emerged as a central challenge for South Korean policymakers this month. After the US Federal Reserve held its benchmark rate steady, pressure intensified on the Bank of Korea’s upcoming decision. The Fed maintained its rate between 4.25 and 4.5 percent following its two-day policy meeting. Meanwhile, the BOK has kept its own base rate unchanged at 2.75 percent since February. Therefore, the Korea–US interest rate gap remains at 1.75 percentage points for now.
However, speculation continues to grow that the BOK might cut its key rate at the May 29 meeting. A 0.25 percentage point cut would widen the Korea–US interest rate gap to 2 percentage points. Such a move could trigger capital outflows and increase pressure on the foreign exchange market. Yet, slowing economic growth and easing inflation may prompt the central bank to act. In the first quarter, GDP contracted by 0.2 percent, raising alarm among economic planners.
While domestic consumption remains weak, falling inflation has given the BOK some space to consider a rate cut. In April, consumer prices rose by just 2.1 percent year-on-year, remaining within the target range for four months. The central bank’s official inflation target stands at 2 percent, offering room for policy easing. Additionally, BOK Governor Rhee Chang-yong hinted at flexibility depending on future economic data. These conditions have reignited debate around the Korea–US interest rate gap.
Meanwhile, the Korean won has recovered some ground against the US dollar in recent days. After dropping to 1,487 won per dollar in April, the currency rebounded to the 1,400 range this week. On Thursday, it opened at 1,398 and hovered near 1,395 by mid-afternoon. Analysts credited the appreciation to stronger Asian currencies and expectations of dollar weakening. This won rebound helps reduce short-term pressure on the central bank.
Nevertheless, market volatility continues to concern financial authorities. A wider Korea–US interest rate gap may create instability in both capital flows and foreign exchange markets. BOK Senior Deputy Governor Ryoo Sang-dai warned that external risks remain high. He cited US tariff changes, global negotiations, and geopolitical tensions as ongoing threats. Despite short-term gains, the central bank faces tough decisions in the weeks ahead. The Korea–US interest rate gap remains a key risk to watch.
