Seoul: South Korea's central bank has reduced its benchmark interest rate by a quarter percentage point, a decision made just days before the country's presidential election. This move aims to stimulate economic growth amid weak domestic demand and uncertainties arising from the U.S.'s extensive tariff policies.
According to Yonhap News Agency, the Bank of Korea's (BOK) monetary policy committee decided to lower the key rate by 25 basis points to 2.5 percent during its rate-setting meeting in Seoul. This marks the fourth reduction since October 2024, when the BOK initiated its monetary easing cycle for the first time since August 2021, culminating in a total policy rate cut of 1 percentage point through May.
Previously in April, the BOK held the policy rate steady, emphasizing the need to support the weak local currency and evaluate the effects of new U.S. tariff measures. "Although concerns about household debt growth and an increase in volatility of foreign exchange markets still persist, the economic growth rate is forecast to decline considerably," the BOK stated, justifying the rate cut to alleviate downward economic pressure.
The decision to cut the rate was unanimous, with four out of six board members indicating the potential for further rate reductions within the next three months, as shared by BOK Governor Rhee Chang-yong in a press conference. The cut underscores the central bank's focus on fostering growth, as it has significantly reduced its 2025 GDP growth forecast from 1.5 percent to 0.8 percent.
Rhee highlighted that sluggish growth is primarily due to downturns in construction, private consumption, and exports, although recovery is anticipated in the second half of the year amid "high uncertainty" in global trade environments. The BOK projects a 1.6 percent economic expansion for the following year.
In April, U.S. President Donald Trump announced reciprocal tariffs, including a 25 percent levy on South Korean goods, with implementation postponed for 90 days. Ongoing trade negotiations between South Korea and the U.S. aim for a "July package" deal to address trade and related issues before July 8.
In the first quarter, South Korea's GDP contracted by 0.2 percent from the previous quarter, marking the first on-quarter contraction in nine months. This unexpected negative growth followed political turmoil caused by former President Yoon Suk Yeol's imposition of martial law and his subsequent removal from office, with a presidential election imminent.
The Korean won's recent strengthening enabled the BOK to pursue the interest rate cut, with the currency remaining below the 1,400-won level against the U.S. dollar. However, the widened gap between South Korea's and the U.S.'s key rates could lead to a depreciation of the Korean currency and potential capital outflows, as cautioned by experts.
Earlier this month, the U.S. Federal Reserve maintained its benchmark interest rate, citing economic uncertainty and inflation risks. Discussions between Seoul and Washington regarding the foreign exchange market were reportedly influential in the strengthening of Asian currencies, though details remain undisclosed.
Rhee advised against "hasty cuts" due to ample liquidity and acknowledged policy "mistakes" during the COVID-19 pandemic when liquidity was misallocated, driving up real estate prices rather than supporting corporate investment or the real economy.
The National Assembly recently passed a supplementary budget of 13.8 trillion won, with additional fiscal measures expected from the next government to influence the BOK's future policy. Presidential candidates Lee Jae-myung of the Democratic Party and Kim Moon-soo of the People Power Party have both pledged substantial fiscal support to stimulate economic growth.