Inflation rises and the won depreciates under dual pressure, the Bank of Korea "holds steady" but leans towards a rate cut path under the shadow of tariffs

According to the Zhitong Finance APP, the Bank of Korea maintained its benchmark interest rate amid an unexpected rise in domestic consumer inflation and the won depreciating to a 16-year low, in order to promote stability in the South Korean financial system. Additionally, the Bank of Korea stated that Trump's aggressive global tariff policy has disrupted the market and cast a shadow over South Korea's economic growth prospects, thus leaning towards a policy direction of further interest rate cuts in the future.

On Thursday, the Bank of Korea kept the seven-day repurchase rate at 2.75%. In a previous survey of 24 economists by Bloomberg, 15 predicted no change, while the remaining 9 predicted a 25 basis point cut. Following the announcement, the won exchange rate showed fluctuations, while the South Korean stock market saw an increase.

Prior to this stabilization policy, the won had briefly fallen to nearly 1,490 won per dollar last Monday, marking the weakest level since March 2009, exacerbating the risk of renewed inflation pressure due to high import costs. In March, South Korea's consumer prices rose 2.1% year-on-year, reversing market expectations that inflation would continue to slow.

In its statement, the Bank of Korea noted that the slowdown in South Korea's economic growth has exceeded expectations due to the impact of U.S. government trade policies and domestic political uncertainties. Based on this, the central bank will continue to maintain a tendency towards further interest rate cuts in the future.

The possibility of the Bank of Korea lowering the benchmark interest rate again in the coming months may become complicated as the nationwide election to decide the next South Korean president approaches in June.

"The possibility of announcing another rate cut in May has increased, but the presidential election may influence the Bank of Korea's decision," said economist Ahn Young-jin from SK Securities. "Given the high likelihood of a change in government, it would be politically more acceptable for the Bank of Korea to cut rates after the new government takes office rather than a few days in advance."

"There are sufficient reasons for further easing. External demand is under pressure, and the overall 10% tariff from the U.S. is still in effect. Weak domestic confidence continues to drag down consumption and investment. We expect the Bank of Korea to resume its easing cycle in May, cutting rates by 25 basis points to support the economy," said economist Kwon Hyo-jun from Bloomberg Economics.

For the Bank of Korea, the won exchange rate remains a key factor. Earlier this week, after Trump hinted at possibly suspending auto tariffs, the country's currency briefly rose to its strongest level since November last year. Automobiles and parts are core exports from South Korea to the U.S., accounting for nearly half of the $70.8 billion in vehicle exports for the entire last year.

Economists predicting a rate cut pointed out the need to ensure economic growth momentum is maintained in the face of potential impacts on exports from the trade situation between South Korea and the global market. Previously, the state of emergency declared by former President Yoon Suk-yeol in December last year triggered severe turmoil in the financial markets and subsequent months of political deadlock, which undermined consumer confidence, leading the central bank to lower its economic forecasts.

Economists covered in Bloomberg's April survey have downgraded South Korea's economic growth forecast for 2025 from 1.6% to 1.4%, and the 2026 economic growth forecast from 2% to 1.9% However, potential risks that may cause policymakers at the Bank of Korea to delay further interest rate cuts include the rising prices of apartments in South Korea and the significant increase in household debt levels. The South Korean government previously stated that it would implement new restrictions on real estate transactions in the Seoul area to cool down the market.

To alleviate consumer borrowing costs and support the economy against the tariff shocks led by the Trump administration, the Bank of Korea has cut interest rates three times consecutively since October 2024. South Korea's economy is highly dependent on exports, especially to the United States, making it one of the economies most vulnerable to the impacts of protectionist policies.

The Trump administration initially imposed tariffs of up to 25% on South Korea under the "reciprocal tariff" system, one of the highest rates imposed on a U.S. security ally, which was later temporarily reduced to 10% for a period of 90 days. South Korea is preparing to send negotiators to the U.S. to seek a lower tariff rate.

Last Wednesday, Trump stated that he had authorized a 90-day "reciprocal tariff suspension" measure for most countries globally, during which the tariffs for these countries would be significantly reduced to 10%.

As the Bank of Korea adopts a cautious monetary policy stance, the South Korean government is boosting the long-weak economy, particularly the long-sluggish consumer spending, by implementing an additional budget of 12 trillion won (USD 8.4 billion), higher than the originally planned 10 trillion won.

However, with the preparation for the new round of South Korean presidential elections on June 3, it remains uncertain whether the ruling and opposition parties can reach an agreement in the National Assembly on the stimulus plan.

Bank of Korea Governor Lee Chang-yong will hold a press conference later on Thursday to answer questions regarding the future direction of interest rate policy. In addition to disclosing how many members of the monetary policy committee disagreed with this decision, he may also elaborate on the committee's expectations for interest rates over the next three months. After the rate cut decision in February, Lee Chang-yong stated that among the six members of the monetary policy committee, two supported another rate cut in the next three months, while four preferred to maintain the current rate