SEOUL, July 10, 2025 (BSS/AFP) - South Korea held interest rates Thursday as leaders grapple with rising household debt and an unpredictable trade war that could see the country hit with steep tariffs.

Asia's fourth-largest economy grew less than expected in the first quarter of this year as the export giant and semiconductor powerhouse reeled from political chaos at home sparked by then-president Yoon Suk Yeol's brief imposition of martial law in December.

It was also leaderless for months as US President Donald Trump unleashed a global trade war and threatened tariffs against US allies.

Seoul was told this week in a letter that it faced 25 percent levies if negotiations are not completed by August 1. It has already been hit with similar tolls on steel and car exports to the United States.

The Bank of Korea said Thursday it would hold its benchmark interest rate at 2.5 percent, as forecast.

"The domestic economy is expected to continue its low growth trajectory for the time being, amid unstable price trends and significant uncertainties surrounding trade negotiations," the BOK said.

"However, given the sharp rise in housing prices in the Seoul metropolitan area and the rapid increase in household debt, it was deemed appropriate to maintain the current policy rate."

As global monetary policies will be influenced by the outcome of tariff negotiations "accordingly, monetary policy will maintain a rate-cutting stance aimed at easing downside risks to growth", it added.

Bank governor Rhee Chang-yong warned the result of talks with Washington will impact the country's growth rate.

"Uncertainty remains high over the country's future growth path, as developments in US trade negotiations and the pace of domestic demand recovery are difficult to predict," Rhee said.

"In particular, the outcome of trade negotiations between the United States and major economies, including South Korea, could significantly impact our exports and overall growth trajectory," he said.

Rhee also hinted that most policy board members were keen to cut rates in the months to come.

Officials in Seoul said Tuesday they were maintaining "close communication" with the Trump administration as they try to head off his tariffs.