Bank of Korea Governor outlines global and domestic challenges for 2026

Bank of Korea Governor Chang Yong Rhee presented a cautious outlook for 2026, highlighting persistent global trade risks and domestic financial vulnerabilities. In his New Year's speech, Rhee emphasized the central bank's resolve to navigate complex policy trade-offs.

Navigating 2025's political and trade storms

The Bank of Korea Governor reflected on a challenging 2025, marked by negative growth in the first quarter due to an unexpected political shock.

Global trade deteriorated sharply in April following aggressive tariff measures, though growth momentum partially recovered after the June presidential election.

The trade conflict surrounding the Korea–United States investment agreement persisted until late October, complicating economic recovery assessments.

In response, the Bank of Korea focused on maintaining economic system confidence.

It cut the Base Rate twice in the first half of the year as growth slowed amid stable inflation, while also supporting vulnerable sectors.

However, heightened instability in the Seoul housing market and increased exchange rate volatility in the second half led the Bank to keep the Base Rate unchanged, balancing growth and financial stability objectives.

Global headwinds and domestic inflation concerns

External conditions for 2026 remain challenging, with significant uncertainty in global trade due to US tariffs and potential US-China tensions.

Monetary policy divergence among major economies, including the Federal Reserve's future direction and potential rate shifts in Japan, the euro area, and Australia, could amplify market volatility.

Fiscal soundness in major economies, marked by increased spending and rising debt burdens, also contributes to higher global long-term government bond yields.

Domestically, consumer price inflation has recently risen to the low-to-mid 2% range but is projected to stabilize at 2.1% for the year.

Growth is forecast at 1.8%, though subject to global trade and semiconductor cycle uncertainties.

Navigating a year of complex trade-offs

The year ahead demands highly calibrated policy judgments from the Bank of Korea, balancing growth, inflation, and financial stability amidst intensifying trade-offs.

Effective communication with markets will be crucial, even if it entails short-term volatility and criticism from those incurring losses.

This transparency is an unavoidable part of aligning market perceptions with policy realities, fostering long-term stability over short-term comfort.