Bank of Korea Gov. Rhee Chang-yong speaks during a press conference at the bank headquarters in Seoul, Tuesday. Yonhap
Central bank lowers key rate by 25 basis points to 2.75%
By Lee Kyung-min
The Bank of Korea (BOK) lowered this year’s growth forecast to 1.5 percent, Tuesday, down from the previous forecast of 1.9 percent amid the deepening economic downturn.
The downward revision warrants a key rate cut, according to the country’s top monetary policymaker, as the economic slump is expected to continue due to a slower-than-expected recovery of domestic consumption and export growth, amid domestic political turmoil and U.S. President Donald Trump's tariff threats.
These factors led the central bank to lower its key rate to 2.75 percent from 3 percent, in a widely expected decision. A 25-basis-point cut translates to about a 0.07 percentage point increase in growth, according to the BOK.
“In January, domestic issues such as the martial law fiasco were important factors to affect the growth momentum. This time, it was growing uncertainties about tariffs after Trump’s inauguration,” BOK Governor Rhee Chang-yong said during a press conference at the bank headquarters in Seoul.
He said the tariff levels are likely to be higher than the BOK's forecast from January. Trump pledged to impose 25 percent of tariffs on steel, aluminum and car imports.
“We initially projected that the U.S. tariffs on China would be imposed after the second quarter, and other countries would be affected next year. However, the advancing timeline of the tariffs imposition and the increases in the tariff rates compounded the uncertainties in the trade conditions,” the governor said.
An extra budget of about 20 trillion won ($13 billion) can push up the GDP growth rate by 0.2 percentage points, but heavy reliance on what should remain short-term, stop-gap measures could come at the expense of the country’s long-term fiscal soundness, Rhee said.
Against this backdrop, the bank lowered the 2025 growth outlook to 1.5 percent, down from 2.3 percent announced in November 2023, 2.1 percent announced in May 2024 and 1.9 percent in November.
The BOK kept 2026's growth forecast at 1.8 percent, which some may regard as too low, according to Rhee. "Korea alone cannot achieve significant growth when global growth rates remain low," he said.
"We are accustomed to high growth rates in the past so 1.8 percent may seem like a crisis, but that's Korea's capacity and we have to accept it."
Tuesday’s benchmark rate decision was unanimous, with two of the rate-setting committee members open to a further cut in the next three months.
Rhee said a cut was warranted to mitigate the slew of downside risks the economy is facing.
Domestic demands, as indicated by declining retail spending in December, were eroded by the fallout of the martial law declaration and the resulting political uncertainties. Investments and the construction sectors across the board have come under the strain of constrained demands.
“We made an off-schedule announcement last month that this year’s growth rate is expected to plunge to between a range of 1.6 percent and 1.7 percent. The figure has since been trended down, complicated by uncertainties over the U.S. tariff policies.”
Rhee countered the criticism that market rates remain high, aided by the central bank missing a rate cut last summer. Many said the BOK’s hold decision in August led to a sharper-than-expected fall in economic growth.
“Criticism that the BOK fell behind the curve is a subject that will come under review in due time, with financial stability and foreign exchange considerations all factored in. Market rates priced in the expectations of a monetary easing path last May and have since been on the decline.”
The rate cut was an expected response to a struggling economy, according to Moody’s Analytics Associate Economist Dave Chia.
The country’s weak currency against the U.S. dollar was a consideration for the bank. However, the won has regained some ground over the past two months, with limited volatility.
“The Korean currency was not quite the problem it was in December,” the economist said.
Inflation ticked up slightly, suggesting that the cut was more about addressing the weak economy.
“GDP in the fourth quarter only narrowly avoided a contraction. Sluggish domestic demand, driven by weak consumer spending and a poor investment performance, is a long-standing concern. Add those to the political instability, the consumer confidence was free falling," Chia said.
In December, the consumer sentiment index fell to its lowest level in nearly two years and it still remains below the neutral mark of 100 after rebounding in January and February.
The outlook for exports is an emerging concern, the economist said.
Exports have kept the economy from slipping into recession in recent quarters, and the boom in artificial intelligence should sustain shipments of advanced memory chips.
However, a slowdown in other major categories and new tariffs in the U.S. will limit the export growth of Korea.
“Future monetary policy decisions will have to weigh the uncertainties in U.S. policy, the weak won and the domestic economy," Chia said. "We expect at least one more rate cut this year."
Park Seok-gil, executive director of JPMorgan Chase Bank Asia Economic Research said the rate cut was in line with expectation.
"Given the significant downward revision of the annual growth forecast for 2025, the necessity to address the downward pressure on economic growth outweighed other considerations, such as inflation and financial stability, prompting the additional rate cut."
However, the BOK adopted a cautious stance by not committing to the pace and timing of future rate cuts, indicating a flexible response based on evolving conditions.
"The governor repeatedly emphasized that addressing all the downward pressures on growth through monetary policy could have significant side effects and indicated that the current terminal rate is assumed to be in a range of between 2.25 percent and 2.5 percent. However, we still expect the terminal policy rate to fall to around 2 percent which appears to be the lower bound of the neutral rate range."
The investment bank says the annual GDP growth rate forecast is expected at 1.2 percent, assuming quarterly growth rates this year will average between a range of 0.4 and 0.5 percent.
BNP Paribas Korea economist Yoon Jee-ho said the central bank kept a cautious easing bias after the widely anticipated 25 basis rate cut.
"In our base case, we forecast the policy rate to reach 2.5 percent this year, with the next cut likely in May. The timing of further rate cuts may be flexible as the BOK weighs the trade-offs among policy variables."
The economist said the risks to the base case is largely balanced.
"The BOK may skip rate cut in the second quarter and instead cut in the third, if concerns on financial stability outweigh domestic growth worries. In a scenario where downside concerns on growth persist, the BOK may deliver a cut both in May and August.
English (United States) ·