The uncertainty brought by Trump's tariffs leads the Bank of Korea to cut interest rates by 25 basis points as scheduled

According to Zhitong Finance, the Bank of Korea lowered its benchmark interest rate on Tuesday to support the South Korean economy, which has been impacted by political turmoil and threatened by the trade effects of Trump's tariff plans. The Bank of Korea cut the 7-day repurchase rate by 25 basis points to 2.75%, in line with expectations, and reiterated its commitment to consider further rate cuts.

In a statement, the Bank of Korea said the rate cut aims to "ease downward pressure on the economy" and added that economic growth is expected to slow significantly. The Bank of Korea has lowered its economic growth forecast for this year to 1.5%, slightly down from its January forecast. Following the announcement, the yield on South Korea's 3-year government bonds fell slightly by 2.5 basis points to 2.587%. As of the time of writing, the exchange rate of the won against the dollar remained stable.

Tuesday's rate cut marks the third reduction by the Bank of Korea in this round of easing. In October last year, the Bank of Korea shifted its policy direction. Authorities have attempted to stimulate consumption by lowering interest rates. After a brief imposition of martial law by the president in December last year, South Korea fell into political chaos.

This clumsy move ultimately led to the impeachment of Yoon Suk-yeol, leaving the country without a clear policy direction, while concerns over Trump's tariffs have dampened the market. A consumer confidence index showed that in February, pessimists outnumbered optimists for the third consecutive month. KB Securities economist Gweon Heejin stated, "Consumption is in a difficult period, and uncertainty remains high. The private sector seems unlikely to rebound on its own, and fiscal spending is now needed to help prevent the economy from losing more momentum."

The Bank of Korea's easing policy may assist South Korea's acting president and finance minister Choi Sang-mok in seeking to boost the economy by increasing fiscal spending in advance. The main opposition party, the Democratic Party, has proposed drafting an additional budget plan worth up to 35 trillion won (approximately $24 billion) to aid economic development.

Bank of Korea Governor Lee Chang-yong stated in an interview with Bloomberg earlier this month, "It is appropriate to add a budget of 15 trillion to 20 trillion won to compensate for the economic growth loss caused by the martial law."

Officials are also preparing for the potential impacts of U.S. protectionist measures. Trump stated last week that he plans to impose tariffs of about 25% on semiconductors, automobiles, and pharmaceuticals. Previously, he ordered a 25% tariff on imported steel and aluminum, a 10% tariff on all Chinese imports, and boasted about reciprocal tariffs on numerous trading partners.

Trade is crucial for South Korea. The country's export strength gives its economy an advantage beyond its own capabilities, as South Korean manufacturers are integrated into a wide global supply chain. In January of this year, South Korea's technology exports experienced their first contraction in over a year due to decreased demand from China during the Spring Festival. However, the total exports for the month adjusted for working day differences showed an increase.

Bloomberg economist Hyosung Kwon stated, "Looking ahead, we expect the Bank of Korea to cut rates three more times in 2025, each by 25 basis points, bringing the benchmark rate down to 2% by the end of the year—unless the won falls sharply again." "The next step may take place in May."

In early February, economists surveyed by institutions lowered their forecast for South Korea's economic growth in 2025 from 1.8% in the previous survey to 1.6%, citing a dimmer global business outlook. Many economists had previously expected that the Bank of Korea would cut interest rates in February after its decision to maintain rates in January. Despite the adverse factors taking shape, Lee Chang-yong warned against speculating on interest rate cuts during an interview, adding uncertainty to the issue