Will Korea and the U.S. diverge on interest rates?

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Will Korea and the U.S. diverge on interest rates?

Published: 12 Dec. 2025, 00:05

Audio report: written by reporters, read by AI

Cho Won-kyeong

The author is a professor at UNIST and the head of the Global Industry-University Cooperation Center.

The U.S. Federal Reserve cut its benchmark rate by 0.25 percentage points on Wednesday. Markets focused on the Fed’s dot plot, which signaled that only one additional cut is likely next year. Given inflation trends, a larger cut, as preferred by U.S. President Donald Trump, appears unlikely.

The Korea-U.S. interest rate gap has narrowed to 1.25 percentage points. Whether that gap will meaningfully shrink next year, or whether the long-running rate inversion will end, remains uncertain.

U.S. Federal Reserve Chair Jerome Powell speaks during a press conference following the Federal Open Markets Committee meeting at the Federal Reserve on Dec. 10 in Washington, DC. The Fed announced it has lowered interest rates by a quarter of a percentage point to a range of 3.5 percent to 3.75 percent in its third rate cut this year. [AFP/YONHAP]

The Bank of Korea faces limited room to deliver an immediate rate cut. Global investment banks have raised their inflation forecasts for Korea, and the central bank has also revised its outlook upward. As long as the impact of the weak won continues to pass through from import prices to processed foods and dining costs, a premature rate cut could undermine policy credibility. A prolonged rate freeze therefore remains the more likely path.

A gradual narrowing of the interest rate gap, together with a recovery in the semiconductor cycle, could support exchange rate stability. But the combination of a strong dollar, high housing prices in Seoul and persistent inflation makes it difficult for the Bank of Korea to shift toward an easing stance.

Market rates are rising instead. The Bank of Korea moved to purchase government bonds this week for the first time in three years and three months, yet market reaction was muted. Korean government bond yields have reached their highest levels of the year amid a global surge in interest rates. Inflation concerns and heavy bond issuance have been major drivers.

Attention now turns to what may follow after the current Fed chair’s term ends in May. Kevin Hassett, chair of the White House National Economic Council and a potential candidate to lead the Fed, has previously said rates could be cut sharply to support employment and debt management, even if inflation runs somewhat high. Markets are watching the possibility closely.

Given these uncertainties, the long period of Korea-U.S. rate inversion is unlikely to end soon. Interest rates will remain the most powerful force shaping Korea’s economy and asset markets. The question is not how precisely one can predict rate movements, but how resilient the economy can remain amid constant change.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.