Seoul: South Korea's central bank lowered its benchmark interest rate by a quarter percentage point Thursday, just five days ahead of the country's presidential election, in an effort to prop up economic growth amid sluggish domestic demand and uncertainties stemming from Washington's sweeping tariff scheme. The monetary policy committee of the Bank of Korea (BOK) slashed the key rate by 25 basis points to 2.5 percent at its rate-setting meeting in Seoul.
According to Yonhap News Agency, this marked the fourth reduction since October 2024, when the BOK began a monetary easing cycle for the first time since August 2021. Since then, the central bank has lowered the policy rate by a total of 1 percentage point through May. At its previous meeting in April, the BOK held the policy rate steady, citing the need to support the weak local currency and assess the evolving impact 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 board, therefore, judged that it is appropriate to cut the base rate and mitigate downward pressure on the economy," the BOK said in a statement. The timing and pace of any further rate cuts will be adjusted in accordance with ongoing tariff negotiations between the United States and major economies, changes in monetary policies in major economies, and developments in geopolitical risks, it added.
Thursday's decision underlined the central bank's policy focus on propping up growth, as it sharply lowered its 2025 economic growth forecast from 1.5 percent to 0.8 percent. In the first quarter, South Korea's real gross domestic product (GDP) -- a key measure of economic growth -- contracted 0.2 percent from the previous quarter, which marked the first on-quarter contraction in nine months.
The unexpected contraction came as former President Yoon Suk Yeol's imposition of martial law in December caused political chaos and dampened consumer spending. Yoon was removed from office last month, and a subsequent presidential election is scheduled to take place on Tuesday. Washington's sweeping tariff measures have also affected South Korea's trade-dependent economy. U.S. President Donald Trump earlier announced reciprocal tariffs, including a 25 percent levy on South Korean goods, though the implementation was later postponed for 90 days.
Trade negotiations are under way between South Korea and the U.S., as the two sides have agreed to work toward a "July package" deal addressing trade and related issues, aiming to reach an agreement before July 8. The recent strengthening of the Korean won also enabled the BOK to opt for an interest rate cut, with the currency staying below the 1,400-won level against the U.S. dollar in recent weeks.