People walk past the Korea Exchange (KRX) building in Seoul, South Korea, on Dec. 9, 2024.
Daniel Ceng | Anadolu | Getty Images
South Korea’s central bank cut rates by 25 basis points Tuesday to their lowest since August 2022, as it strives to stimulate a slowing economy.
The Bank of Korea cut rates to 2.75% from 3%, in line with expectations from economists polled by Reuters, trimming them for the third time in four meetings.
The central bank said the decision was taken to mitigate downward pressure on the economy, forecasting growth to “decline significantly.”
BOK cut its 2025 growth outlook to 1.5% from 1.9% forecast in November, saying that domestic demand recovery and export growth are likely to be lower than previously expected due to deteriorating economic sentiment and U.S. tariff policies.
It acknowledged that concerns about foreign exchange markets still remain, but added inflation had stabilized while household debt growth had slowed.
The BOK maintained its 1.9% inflation forecast for 2025, while the core inflation outlook was lowered to 1.8% from 1.9% in November.
The decision comes as South Korea continues to grapple with political uncertainty over the impeachment trial of President Yoon Suk Yeol.
The country’s Constitutional Court will convene for the final hearing of Yoon’s trial Tuesday, according to domestic media.
Immediately after the rate decision, the country’s benchmark Kospi stock index fell 0.46%, while the South Korean won weakened 0.2% to trade at 1,431.3 against the U.S. dollar.
Speaking to CNBC’s “Squawk Box Asia,” Alex Holmes, Asia research director at the Economist Intelligence Unit, said he expects the BOK to cut rates faster rather than slower.
The BOK initially had concerns over financial stability, especially over reheating the housing market and household debt, but following the martial law flip-flop by Yoon in December, consumer and business sentiment in South Korea plunged, shifting the “balance of risks” toward the economy, Holmes said.
“There’ll be concern now about supporting the economy and inflation, and these concerns about household debt will probably take a sort of a bit of a back seat,” he added.
South Korea’s GDP growth in the fourth quarter missed expectations, clocking its slowest expansion 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 rate 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 sees 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 last week that the political turmoil in Seoul that triggered excessive weakness in the South Korean won has abated.
She also said that inflation would remain within the BOK’s 2% target range this year, which will give 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 high of 2.2%, but is still close to the BOK’s target of 2%.
However, Kang warned rate cuts could accelerate the rise in domestic household debt and property prices.