Seoul: South Korea's central bank reduced its benchmark interest rate by a quarter percentage point on Tuesday in a move aimed at bolstering economic growth, which has been affected by domestic political upheaval and the Donald Trump administration's extensive tariff policies. The monetary policy committee of the Bank of Korea (BOK) lowered the key rate by 25 basis points to 2.75 percent during a meeting in Seoul.
According to Yonhap News Agency, the decision follows a previous rate freeze aimed at supporting the weak local currency while evaluating the impact of two rate reductions in the October and November meetings. The central bank's focus on economic expansion was evident as it revised its 2025 growth forecast for Asia's fourth-largest economy down to 1.5 percent from 1.9 percent.
"Although concerns about foreign exchange markets still remain, inflation stabilization has continued along with an ongoing slowdown in household debt, while the growth rate is forecast to decline significantly. The board, therefore, judged that it is appropriate to further cut the base rate and mitigate downward pressure on the economy," the BOK stated.
The BOK identified the Trump administration's tariff policies, declining exports, and a decrease in consumption following President Yoon Suk Yeol's unexpected martial law declaration as major factors affecting growth momentum. The rate cut decision was unanimous, with two of the six board members advocating for the possibility of further cuts within the next three months, according to BOK Governor Rhee Chang-yong.
Governor Rhee emphasized the need for coordination between monetary and fiscal policies to achieve the 1.5 percent growth target for the year. He also proposed a supplementary budget of less than 20 trillion won (US$14 billion) to offset the growth momentum lost due to the political crisis triggered by President Yoon's martial law imposition.
President Yoon's martial law declaration on December 3 led to decreased private spending and investment and resulted in a leadership vacuum following his impeachment by the National Assembly pending a Constitutional Court ruling. Yoon is currently under investigation on charges of insurrection after his arrest last month.
The Trump administration's pledge to impose 25 percent tariffs on all steel and aluminum imports, alongside a presidential memorandum for "reciprocal" tariffs, pose potential threats to South Korea's export-driven economy. January saw a 10.3 percent year-on-year decline in exports to US$49.1 billion, marking the first on-year fall in 16 months and resulting in the first trade deficit in 20 months at $1.89 billion.
Retail sales, a critical indicator of private spending, fell significantly in 2024, marking the third consecutive year of decline. South Korea's real GDP increased by only 2 percent in 2024, falling short of the BOK's 2.2 percent growth forecast, while the economy grew just 0.1 percent in the fourth quarter, well below the anticipated 0.4 percent growth.
"While closely monitoring changes in domestic and external economic policies and in the domestic political situation, as well as the effects of the base rate cuts so far on inflation, economic growth and financial stability, the board will determine the timing and pace of any further base rate cuts," the BOK said.
The Korean won has weakened and remained below the 1,400 won per dollar mark, trading at 1,430.6 won against the greenback as of midday Tuesday, slightly up from the previous session.