Fiscal aid remains unresolved, South Korea's central bank may restart interest rate cuts

According to the Zhitong Finance APP, the Bank of Korea will announce its interest rate decision on Tuesday. Economists generally expect the Bank of Korea to cut the benchmark interest rate by 25 basis points to 2.75% on Tuesday.

There is widespread expectation that the Bank of Korea will resume its easing cycle this week to support the South Korean economy against the tariff war initiated by Donald Trump, especially in the absence of early fiscal stimulus measures.

In January of this year, all six members of the committee, except for Bank of Korea Governor Lee Chang-yong, expressed an open attitude towards a rate cut in the next three months. Lee Chang-yong did not disclose his views at that time. Since then, Lee has called for fiscal stimulus measures to play a role in promoting economic development while expressing caution regarding the weakness of the Korean won.

Ashok Bhundia, an economist at the Institute of International Finance (IIF), stated, "Supplementary budgets are also key to addressing economic downside risks. If the South Korean government fails to implement a supplementary budget, further rate cuts may be necessary."

Lee Chang-yong suggested increasing the budget by 15 trillion to 20 trillion won, which is lower than the 35 trillion won proposed by the main opposition party, the Democratic Party, which controls the South Korean National Assembly. The South Korean government is studying the details of the supplementary budget proposal.

Political turmoil has led to a significant depreciation of the Korean won against the US dollar. After the Bank of Korea maintained the interest rate at 3% last month, Lee Chang-yong stated that exchange rate trends would impact monetary policy.

After two rate cuts by the end of 2024, the Bank of Korea paused further cuts, reflecting concerns that a third consecutive cut could put greater downward pressure on the won. South Korea is one of the countries most susceptible to exchange rate fluctuations, as its energy, food, and economic growth all rely on trade.

Citigroup economists Jin-Wook Kim and Jiuk Choi stated that the additional 25% tariffs from the US would hit South Korea's automotive, pharmaceutical, and semiconductor industries, and they expect a 0.2% loss in South Korea's GDP. They noted, "In this scenario, the indirect negative impact on the South Korean economy could be much larger."

Surveys show that economists expect the Bank of Korea may cut rates three times, bringing the interest rate down to 2.25% by the end of this year.

A week ago, Lee Chang-yong reiterated that the Bank of Korea is still in an easing cycle while stating that the committee will consider various factors to determine the interest rate