The Bank of Korea has initiated its fourth interest rate cut this year in response to the economic downturn, lowering the benchmark interest rate to 2.5%
The Bank of Korea announced a 25 basis point cut in the benchmark interest rate to 2.5%, marking the fourth rate cut since October last year. This rate cut aligns with market expectations, with the economic growth forecast revised down from 1.5% to 0.8%. The central bank stated that economic growth will significantly slow down, and there is a high degree of uncertainty regarding future growth. The market reacted quickly, with the Korean won depreciating by 0.6% against the US dollar. Analysts expect the benchmark interest rate to drop to 2.25% within the year
According to Zhitong Finance APP, the Bank of Korea announced on Thursday that it would lower the benchmark interest rate by 25 basis points to 2.5%. This marks the fourth rate cut since the easing cycle began last October. The reduction fully aligns with market expectations, as all 21 surveyed institutions' economists made the same prediction. Additionally, the central bank significantly revised its economic growth forecast for 2025 down from 1.5% to 0.8%, reflecting increasing downward pressure on the economy.
In a post-meeting statement, the Bank of Korea admitted: "Although prices remain stable, the economic growth rate is expected to slow significantly this year, and the future growth path remains highly uncertain." This statement leaves room for continued easing policies. The market reacted immediately, with the Korean won falling 0.6% against the US dollar on the same day, and the three-year government bond yield also declined.
The decision to cut rates is intertwined with multiple economic challenges: after negative growth in the first quarter, there are no signs of rebound, the export engine continues to stall, and both equipment investment and private consumption are sluggish. Notably, the recent rise of the Korean won against the US dollar to a seven-month high has created favorable conditions for the central bank to restart its easing policy—this contrasts sharply with the limited fluctuations in the exchange rate months ago.
The interplay between the political cycle and economic decision-making is particularly prominent. With only five days left until the presidential election, Bank of Korea Governor Lee Chang-yong emphasized in April that "the May decision must maintain political neutrality and focus on economic needs." At that time, all six monetary policy committee members of the Bank of Korea supported a rate cut within three months, sending a strong easing signal to the market.
Kiwoom Securities analyst Ahn Ye-ha pointed out: "The impact of tariffs and weak exports have forced a significant downward revision of economic forecasts. We expect the benchmark interest rate to drop to 2.25% within the year and possibly further down to 2% next year." This judgment is based on the current economic predicament: April's export figures, adjusted for working days, fell by 0.7% year-on-year, and pillar industries such as automobiles and steel still face tariff threats from the US.
The presidential election adds uncertainty to policy direction. Democratic candidate Lee Jae-myung has promised a stimulus plan of 30 trillion won (approximately $21.8 billion), while conservative candidate Kim Moon-soo has also proposed a welfare spending plan of similar scale. The National Assembly has already passed a supplementary budget of 13.8 trillion won, but larger-scale fiscal expansion awaits decisions from the new government.
The shadow of trade friction continues to loom. Although the US International Trade Court ruled on Wednesday that parts of the Trump administration's tariffs on Korean goods were illegal, the White House has made it clear it will appeal. Currently, Korean products such as automobiles and steel still face a temporary tariff of 10% (originally set at 25%), and Samsung Electronics' smartphones may become the next target of sanctions.
Bloomberg economist Kwon Hyoseong analyzed: "If the new government implements an active fiscal policy after the election, it will relieve the pressure on monetary policy." However, for now, the central bank still needs to bear the responsibility of stabilizing the economy alone Lee Chang-yong will disclose the policy forward guidance at today's press conference, and the market will closely watch for any internal disagreements within the decision-making body.
This interest rate cut reflects the deep-seated dilemmas facing the South Korean economy: it must cope with the deteriorating global trade environment while also addressing the uncertainties brought about by domestic political changes. As the benchmark interest rate approaches pre-pandemic levels, the space for monetary policy is gradually narrowing, and the synergistic effect of fiscal and industrial policies will become key to breaking the deadlock
