Economic stagnation + persistent easing of inflation, the Bank of Korea is expected to initiate a new round of interest rate cuts

According to the latest survey targeting multiple economists, they collectively expect the Bank of Korea to lower the key policy interest rate by 25 basis points on Thursday, mainly due to the unexpected contraction of South Korea's economic activity in the previous quarter and the continued moderation of inflation. Additionally, the central bank's policymakers have fully hinted at the possibility of a rate cut, providing important data evidence for the Bank of Korea to restart its monetary easing cycle.

It is noteworthy that Bank of Korea Governor Lee Chang-yong had previously hinted at the possibility of a rate cut during the monetary policy meeting in April, coupled with the official data released a few days later showing that South Korea's GDP unexpectedly declined by 0.2% quarter-on-quarter in the first quarter.

In terms of economic data, inflation in South Korea continues to cool, with the inflation rate in April at 2.1%, very close to the Bank of Korea's long-term inflation target of 2.0%; the won has rebounded about 9% from last month's low, also providing more room for the Bank of Korea to release additional monetary easing policies.

All 36 global economists surveyed between May 19-25 expect the Bank of Korea to lower the benchmark interest rate by 25 basis points to 2.50% on May 29, a level last seen in August 2022.

Eddie Wu, the chief economist for South Korea at Société Générale, stated: "During the April monetary policy meeting, policymakers strongly hinted at a rate cut, and short-term economic growth expectations may also be significantly downgraded. The subsequent data did not present any factors sufficient to prevent the Bank of Korea from cutting rates. In fact, the contraction in the first quarter, ongoing uncertainty regarding U.S. tariffs, and the decline in the USD/KRW exchange rate further support the Bank of Korea's monetary easing policy."

Among the 27 economists providing long-term interest rate forecasts, 23 expect the benchmark rate to be lowered by another 50 basis points to 2.25% by the end of the next quarter, which is generally consistent with the previous survey data.

However, among these 27, about 56% (15 people) predict that by the end of the fourth quarter, the Bank of Korea will cut rates by another 25 basis points, bringing the benchmark policy rate down to 2.00%, which is 0.25 percentage points lower than the expectations from the April survey.

In addition to the collective forecast for a monetary easing cycle, the surveyed economists also generally pointed out that the South Korean presidential election will be held in early June, and it is expected that the South Korean government will further introduce fiscal policy support beyond the already approved supplementary government budget of 138 trillion won (10.1 billion USD).

Wu Xiuzhen, the chief economist for South Korea at Morgan Stanley, wrote: "After lowering the benchmark rate to the expected level of 2.00%, we believe the Bank of Korea will focus on stabilizing the financial environment and hand over the baton for stimulating economic growth to government agencies, meaning that fiscal policy will be more vigorously implemented starting next year."

Another economist survey indicates that South Korea's economy is expected to grow by 1.3% in 2025, higher than the 1.0% growth forecast given by the International Monetary Fund, but lower than the 1.5% growth estimate provided by the Bank of Korea. However, most economists believe that the Bank of Korea will lower this growth expectation on Thursday