The US Federal Reserve held its key interest rate unchanged, adding pressure on the Bank of Korea’s rate-setting decision later this month.

Following a two-day Federal Open Market Committee meeting, the Fed maintained its benchmark lending rate in the 4.25–4.5 percent range. With the decision, the gap between Korea’s key rate and the US rate remains at 1.75 percentage points.

The Fed’s decision puts additional pressure on the BOK, which has kept its policy rate at 2.75 percent since February. In its most recent meeting in April, the BOK’s monetary policy board held the rate steady, citing concerns about a volatile Korean won. The central bank is set to hold its next rate-setting meeting on May 29.

If the Fed had cut the rate by 0.25 percentage point, the BOK would find it easier to cut rates, but with the Fed standing pat, BOK’s potential rate cut would widen the rate gap to 2 percentage points — increasing the risk of foreign capital outflows.

Despite this concern, the BOK is under growing pressure to lower rates to support the country’s slowing economy. While the BOK projected a 1.5 percent gross growth in domestic product for the year in its February outlook, the 0.2 percent contraction in the first quarter, stemming from sluggish domestic consumption and a slowdown in exports, has darkened the forecast.

On the inflation front, easing consumer prices are giving the BOK more room to consider a rate cut. In April, Korea’s consumer prices rose 2.1 percent year-on-year, staying within the 2 percent range for the fourth consecutive month. The central bank’s inflation target is 2 percent.

“Don’t doubt the possibility of a base rate cut. The BOK can lower the rate depending on the economic circumstances,” BOK Gov. Rhee Chang-yong told reporters while attending the Asian Development Bank’s annual meeting in Milan.

The recent appreciation of the Korean won has also eased pressure on the BOK. After weakening to as low as 1,487 won per US dollar in April, the currency has rebounded to the 1,400 range, for the first time in roughly six months. On Thursday, the won closed daytime trading at 1,396.6 won.

“The pace of the won’s recent appreciation could be concerning, but the current level is not excessive. Given the current dollar index, the won could strengthen further to the low 1,300 range,” said Lee Jung-hoon, an economist at Eugene Investment & Securities.

While the won’s rebound eases some short-term concerns, potential volatility in the foreign exchange market remains as the recent appreciation was sparked by fears that the US will push for dollar depreciation to address its trade deficit, rather than an improved outlook for the Korean economy. In such circumstances, a wider Korea-US interest rate gap could spark increased market instability.

“Volatility in the financial and forex markets could escalate depending on developments in external factors such as US tariff policies, negotiations with major economies and geopolitical risks,” said BOK Senior Deputy Gov. Ryoo Sang-dai at a meeting convened shortly after the FOMC decision.

By Im Eun-byel (silverstar@heraldcorp.com)