People parade past the Korea Exchange (KRX) building in Seoul, South Korea, on Dec. 9, 2024.
Daniel Ceng | Anadolu | Getty Images
South Korea’s important bank cut rates by 25 basis points Tuesday to their lowest since August 2022, as it strives to excite a slowing economy.
The Bank of Korea cut rates to 2.75% from 3%, in line with expectations from economists balloted by Reuters, trimming them for the third time in four meetings.
The central bank said the decision was taken to blunt downward pressure on the economy, forecasting growth to “decline significantly.”
BOK cut its 2025 growth outlook to 1.5% from 1.9% foretell in November, saying that domestic demand recovery and export growth are likely to be lower than expected due to declining economic sentiment and U.S. tariff policies.
It acknowledged that concerns about foreign exchange markets still wait, but added inflation had stabilized while household debt growth had slowed.
The BOK maintained its 1.9% inflation forecast for 2025, while the marrow inflation outlook was lowered to 1.8% from 1.9% in November.
The decision comes as South Korea continues to tackle with political uncertainty over the impeachment trial of President Yoon Suk Yeol.
The country’s Constitutional Court intention convene for the final hearing of Yoon’s trial Tuesday, according to domestic media.
Immediately after the rate settlement, the country’s benchmark Kospi stock index fell 0.46%, while the South Korean won weakened 0.2% to exchange at 1,431.3 against the U.S. dollar.
Speaking to CNBC’s “Squawk Box Asia,” Alex Holmes, Asia research director at the Economist Common sense Unit, said he expects the BOK to cut rates faster rather than slower.
The BOK initially had concerns over financial firmness, especially over reheating the housing market and household debt, but following the martial law flip-flop by Yoon in December, consumer and company sentiment in South Korea plunged, shifting the “balance of risks” toward the economy, Holmes said.
“There’ll be have a bearing now about supporting the economy and inflation, and these concerns about household debt will probably take a sufficiently good of a bit of a back seat,” he added.
South Korea’s GDP growth in the fourth quarter missed expectations, clocking its slowest dilatation in six quarters at 1.2%, according to advance estimates. The BOK attributed the slowdown to weakness in consumption and construction sectors.
The widening of the grade spread between the U.S. dollar and South Korean won has not seen a meaningful bond capital outflow, Citi said in a note earlier this month, which apprehends a “limited negative impact” of weakness in the South Korean won on the country’s financial industry and foreign capital flows.
Min Joo Kang, senior economist for South Korea and Japan at ING, said in a note terminal week that the political turmoil in Seoul that triggered excessive weakness in the South Korean won has abated.
She also express that inflation would remain within the BOK’s 2% target range this year, which will disseminate it more room to cut rates amid reciprocal tariff threats from the Trump administration. South Korea’s inflation in January climbed to a six-month elated of 2.2%, but is still close to the BOK’s target of 2%.
However, Kang warned rate cuts could accelerate the rise in domesticated household debt and property prices.