Seoul: The Bank of Korea (BOK) has revised its economic growth forecast for South Korea in 2025, reducing it from 1.9 percent to 1.5 percent. The adjustment comes as the nation grapples with political turmoil and the impact of the Donald Trump administration's comprehensive tariff policies, among other economic challenges.
According to Yonhap News Agency, the BOK's new projection marks a notable 0.4 percentage-point decrease from its previous estimate in November. This revision suggests that South Korea's annual growth rate may fall below its potential growth rate of 2 percent for the first time. The BOK's outlook is more conservative compared to other major institutions, with the finance ministry predicting a 1.8 percent growth and the Organization for Economic Cooperation and Development (OECD) forecasting a 2.1 percent increase.
In response to the downgraded forecast, the BOK has lowered its key interest rate by a quarter-percentage point to 2.75 percent. For 2026, the BOK maintains its growth forecast at 1.8 percent, consistent with its previous projections in November. The central bank attributes the slowdown to weakened export growth and a decline in consumption, exacerbated by increased political uncertainties, including the declaration of martial law and adverse weather conditions.
The BOK statement highlighted that trends in domestic demand recovery and export growth are expected to fall short of previous expectations due to deteriorating economic sentiment and U.S. tariff policies. Additionally, the central bank noted significant uncertainties surrounding trade policies in major economies, the Federal Reserve's monetary policy, Korean government economic stimulus measures, and changes in the domestic political landscape.
In 2024, South Korea's real gross domestic product (GDP) grew by 2 percent, falling short of the BOK's anticipated 2.2 percent growth. The fourth quarter of 2024 saw minimal growth of just 0.1 percent quarter-on-quarter, significantly below the BOK's forecast of 0.4 percent. This sluggish performance followed President Yoon Suk Yeol's brief martial law declaration, which adversely affected financial markets and private consumption.
Further compounding these challenges is the political situation, with President Yoon's impeachment and the resulting leadership vacuum hindering the country's ability to respond effectively to Trump's trade policies. On the inflation front, the BOK has maintained its 2025 estimate at 1.9 percent. In January, consumer prices rose by 2.2 percent year-on-year, the largest increase in six months, driven by high global oil prices and a weakening local currency. However, the BOK anticipates that weak domestic demand will help offset inflationary pressures.
The BOK indicated that future inflation trends will be influenced by exchange rates, global oil prices, domestic and international economic conditions, and government price stabilization measures.