Bank of Korea Cuts Rates for Fourth Time Amid Domestic and Global Pressures, Reaching 2.5%, a Near Three-Year Low

TradingKey - On Thursday, the Bank of Korea announced a resumption of its rate-cutting cycle, lowering the benchmark interest rate by 25 basis points to 2.50% from 2.75%. 

This marks the fourth consecutive rate cut by the central bank, bringing rates to their lowest level since August 2022. Concurrently, it slashed its GDP growth forecast for this year from 1.5% to 0.8%, marking the largest downward revision since the pandemic.

The Bank of Korea attributed this rate cut to the anticipated sharp decline in economic growth while inflation remains relatively stable. The bank stated it would maintain its dovish stance to alleviate downward economic pressures, aiming to boost consumption and investment.

The backdrop to this rate cut is complex, as South Korea faces dual pressures from domestic political turmoil and the strain of trade tensions. Last December, former President Yoon Suk-yeol was impeached after a failed attempt to impose martial law, casting a cloud of political uncertainty over the country. In early April, President Trump announced a 25% "reciprocal tariff" on South Korea, which, though delayed by 90 days, looms with a final deadline of July 8.

Insiders hold a pessimistic outlook on recent US-South Korea negotiations. The July 8 tariff negotiation deadline is seen as overly tight for South Korea, with the country's trade industry minister citing insufficient time, and the elections scheduled for June 3 potentially further delaying progress. The primary reason behind Trump's tariff announcement — South Korea's $55 billion trade surplus with the US — is unlikely to see significant reduction in the short term. If the tariff policy persists, South Korea, as an export-driven economy, could face substantial repercussions.

Additionally, South Korea's economic fundamentals are deteriorating rapidly, with GDP contracting by 0.1% in the first quarter, marking the first negative growth since the fourth quarter of 2020.

Gareth Leather, Senior Asia Economist at Capital Economics, remarked that the upcoming presidential election next week should usher in fiscal stimulus, with an expected uptick in consumer spending. However, given the challenges of a declining real estate sector and disrupted exports, this stimulus may not deliver a significant boost.

Following the announcement of the rate cut, South Korea's KOSPI index closed up 1.89% on May 29, at 2,720.61 points.