The Bank of Korea (BOK) yesterday flagged the likelihood of more interest rate cuts to come after trimming borrowing costs and slashing this year’s growth forecast as US President Donald Trump’s tariffs and political turmoil weigh on the South Korean economy.
The central bank lowered its seven-day repurchase rate by a quarter percentage point to 2.5 percent and almost halved its growth forecast for this year to 0.8 percent from its projection in February. That move largely reflects the impact of the US trade tariffs rolled out since then, and while their legality is currently in dispute, South Korea’s trade-reliant economy is among those most at risk if they come into full effect.
“Since growth momentum has weakened more significantly than initially expected, we believe there’s a possibility rates will be cut more than we thought going forward,” BOK Governor Rhee Chang-yong told a news briefing following the decision.
Photo: EPA-EFE
The widely expected rate cut, the fourth since the autumn, comes just five days before the nation chooses a new leader to take on the challenges of reviving the economy and dealing with Trump.
Front-runner Lee Jae-myung of the Democratic Party has pledged at least 30 trillion won (US$21.8 billion) in stimulus to support households and small businesses. His conservative rival, Kim Moon-soo, said he would discuss a supplementary budget of around the same magnitude aimed at public welfare.
Even with those extra spending plans being flagged by the leading candidates, Rhee warned of the likely need for further stimulus next year in another indication of the difficulties the economy faces. Still, greater help from the government may temper the need for further BOK action.
“A downward revision of the growth forecast seemed inevitable due to the impact of tariffs and the slowing down of exports,” Kiwoom Securities Co analyst Ahn Yea-ha said. “I expect the base rate to come down to 2.25 percent this year, with perhaps one more cut next year, bringing it down to around 2 percent in total.”
The bank had long appeared ready to lower borrowing costs after the economy slipped into reverse in the first quarter, with most recent indicators showing little sign of a rebound. Last month, all six board members were open to a rate cut within three months in what appeared to be a clear signal that action was coming this month.
Rhee said that four members could now see lower rates in the coming three-month period, a likely indication that the central bank would keep a one-cut a quarter pace for the time being. Still, he also said rates would likely not fall below 2 percent for now.
“The BOK’s decision today was broadly more dovish than our expectation,” Barclays Bank PLC economist Bumki Son said. “However, their caution against going below 2 percent in the near-term still strikes a note of caution.”
Son sees the next cuts coming in October and February.
In addition to weak exports, subdued investment and faltering consumption pointing to an economy in need of support, the recent appreciation of the won likely gave the central bank additional scope to resume monetary easing without stoking inflation. The currency recently climbed to a seven-month high against the US dollar, after months of volatility previously restrained the BOK’s options.
The presidential election on Tuesday adds a layer of political sensitivity to the rate cut. The vote follows the ousting of former South Korean president Yoon Suk-yeol last month, after his botched martial law triggered a constitutional crisis and economic uncertainty.
“The prospect of aggressive fiscal stimulus under a new government following next week’s presidential election may reduce the pressure on monetary policy to carry the burden alone,” Bloomberg economist Hyosung Kwon said.
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