Bank of Korea cuts key rate to support growth

The Bank of Korea (BOK) lowered its key interest rate by 25 basis points, a move aimed at bolstering an economy that showed minimal growth in the last quarter. This decision aligns with the predictions of economists who, in a recent Reuters poll, anticipated not only this reduction but also forecasted an additional 50 basis points of easing throughout the year.

The central bank had maintained its policy rate in the previous month, choosing to monitor the effects of domestic political unrest on the currency before implementing further rate cuts. However, with the won strengthening by approximately 2.5% against the U.S. dollar this year and inflation hovering at 2.2% in January—close to the BOK’s medium-term target of 2%—there is now space for the bank to lower rates in support of the economy.

A near-unanimous consensus among the 36 economists surveyed between February 14-20 expected the rate cut, bringing the base rate down to 2.75%. Stephen Lee, chief economist at Meritz Securities, expressed belief in the necessity of the cut, stating, "They will be acknowledging that the economy will face a greater negative output gap, which justifies the BOK’s move to address growth." Lee also suggested that further rate cuts could be on the horizon this year if foreign exchange volatility remains low.

South Korea’s economic outlook has been affected by weaker exports, declining consumer sentiment, and persistent political challenges. These factors have led the BOK to project slower growth for the coming year than the previously estimated 1.9%. The economy, which is heavily reliant on semiconductor exports, especially to the U.S., also faces risks from potential U.S. tariff threats, adding pressure on the BOK to reduce policy rates to avert a possible recession.

According to the majority of economists in the poll, an additional quarter-point rate cut to 2.50% is expected in the second quarter, with a further reduction anticipated in the third quarter, potentially bringing the rate down to 2.25%. This is in contrast to the U.S. Federal Reserve, which is projected to make fewer or no cuts in the coming months.

Despite differing opinions on the timing of the next Fed rate cut, the median forecasts suggest Korean rates will hold at 2.25% in the fourth quarter of 2025. Bum Ki Son, North Asia economist at Barclays (LON:BARC), shared his perspective: "Our view is the Fed will only cut once this year, in June... the U.S. (Fed) is pausing because they’re getting closer to the neutral, but (BOK) still has some room to cut in order to get to the neutral."

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