The Bank of Korea (BOK) reduced its benchmark interest rate by a quarter-percentage point to 2.75%, in a move aimed at stimulating South Korea’s economy, which is facing both domestic political turmoil and potential trade disruptions due to US President Donald Trump’s tariff plans. This rate cut, which marks the third reduction in the current easing cycle, comes after the BOK lowered its growth forecast for 2025, now expecting the economy to expand by just 1.5%, slightly below its earlier forecast of 1.6%.
The decision to cut rates was widely anticipated, with all 22 economists polled by Bloomberg predicting the move. Despite the cut, the South Korean won continued its decline, down 0.1% against the US dollar at 1,431.00. Three-year government bond yields edged lower by 3.4 basis points to 2.578%, reflecting the market’s reaction to the policy shift.
The rate cut is part of a broader effort to bolster domestic demand, which has been significantly impacted by the political crisis that unfolded in South Korea late last year. After President Yoon Suk Yeol briefly imposed martial law in December, which led to his impeachment and arrest, South Korea has struggled to regain policy stability. This political turmoil, coupled with uncertainties surrounding Trump’s protectionist trade measures, has dampened consumer confidence, with a recent survey showing more pessimists than optimists for the third consecutive month.
KB Securities economist Gweon Heejin noted that “Consumption is in a rough patch with uncertainties remaining high,” and emphasized that the private sector alone cannot be expected to drive a rebound. The need for fiscal stimulus has become apparent, with Finance Minister Choi Sang-mok, acting as South Korea’s president, seeking to implement fiscal measures to support the economy. The opposition Democratic Party has proposed a supplementary budget worth up to 35 trillion won ($24 billion) to provide additional support.
The BOK’s actions align with efforts by the government to mitigate the impact of Trump’s proposed tariffs on key sectors, including semiconductors, automobiles, and pharmaceuticals. With South Korea’s economy heavily reliant on exports, especially in technology, the country has already seen a contraction in technology exports, marking the first decline in over a year. This drop was attributed to weakened demand from China during the Lunar New Year holiday.
Despite the challenges, South Korea’s export-driven economy remains a critical player in global supply chains, making the geopolitical risks stemming from US protectionism particularly concerning. Earlier in February, economists downgraded their growth forecasts for South Korea, with many revising their expectations for 2025 from 1.8% to 1.6%, in light of the ongoing global trade uncertainties.
Governor Rhee Chang-yong is expected to address questions on the future trajectory of rate policy in a press conference later today, where he will discuss any dissenting views among the BOK board members and provide insights into their expectations for rates in the coming months.
In conclusion, the BOK’s rate cut is a response to domestic and global challenges, aiming to stimulate consumption and counter the negative impacts of political instability and trade risks. However, with concerns over Trump’s tariffs and the uncertain global economic outlook, South Korea’s recovery remains fragile.
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