Caroline Wong, APAC country risk analyst at Fitch Solutions / Courtesy of Fitch Solutions

The Bank of Korea (BOK) will not be able to pursue too extensive an easing policy, stymied by high household debt levels that could revive mortgage growth and the subsequent financial risks.

However, a more moderate pace of cuts could come at the expense of economic growth, according to a Fitch economist, Wednesday.

Korea's world-highest debt levels could slow down the pace of easing compared to the U.S. Federal Reserve, according to Caroline Wong, APAC country risk analyst, at Fitch Solutions.

The assessment coincides with increasing calls for immediate further easing, an effective mitigant for the prolonged tightening of the post-pandemic years and the resulting sustained high borrowing costs.

The country's growth will be limited to 2.1 percent this year, and will likely slow down further to 1.9 percent next year, the analyst said. Underpinning the downward revision from the previous forecast of 2.5 percent and 2.1 percent, respectively, were the slower-than-expected recovery in domestic consumption and impending weakening in economic activity in both the United States and mainland China.

"We remain confident that the BOK will ease more modestly than the Fed, not least due to high domestic household debt levels," she said in an interview with The Korea Times.

Also factored in are the pass-through effects of October's hawkish cut, as well as the recent rapid depreciation of the country's currency, the won, against the U.S. dollar.

"We think the BOK will not move in lockstep with the Fed. It will want to assess the impact on household debt, home prices and subsequently the Korean currency — one of the poorest performing in Asia this year — before easing policy further."

Further complicating the easing dynamics, though still distant, are the renewed inflationary pressures that could arise under a second Donald Trump presidency.

"The stalled easing by the Fed will prompt the BOK to slow or outright halt its easing cycles," she said. "In a worst-case scenario, monetary policy could be tightened."

Bank of Korea Gov. Rhee Chang-yong / Yonhap

The bleak growth outlook for Korea is explained in part by the vulnerable domestic investment landscape, reflective of Korea's high corporate debt levels, she said.

Korea's corporate debt burden has been rising sharply over the past few years, relative to most other major economies, touching 112.2 percent of GDP in the first quarter of this year.

Further clouding the view is the impending slowdown in economic activity in the world's two largest economies, tied closely to the growth profile of Korea's export-reliant economy.

High-tech manufacturing in the country is closely integrated into supply chains in the U.S., mainland China and Japan, making it a useful bellwether of the global economy, in her view.

"Korea's official export sentiment indicator also fell to a one-year low in October. Its growth trajectory would be lackluster compared to its recent past, as indicated in part by two consecutive months of soft PMI (purchasing managers' index) readings of 48.3 in September and October of this year and the slowdown in exports growth."

A second Trump administration will almost certainly be negative for Korea, characterized by strong export ties with the U.S.

Korea's exports to the U.S. make up 6.7 percent of GDP, she said.

In a simulation where a 10 percent increase in U.S. tariffs on imports is assumed, a 0.8 percentage point fall in baseline growth will follow.

"The scenario does not include the potential retaliatory measures from Korea if any. Looking ahead, renewed inflationary pressures could come from reduced tax fuel cuts effective November as well as the 9.7 percent hike in industrial electricity rates."