The Bank of Korea cuts interest rates by 25 basis points, lowering growth expectations for the year

On Tuesday, the Bank of Korea announced that it would lower the seven day repo rate to 2.75% and stated that it may further cut rates in the future to ease downward pressure on the economy. This decision is in line with market expectations, as all 22 economists surveyed by Bloomberg predicted this interest rate cut.

The Bank of Korea stated in a statement that "this interest rate cut aims to alleviate downward pressure on the economy, and the current growth outlook has significantly slowed down

Meanwhile, the Bank of Korea has lowered its economic growth forecast for 2024 to 1.5%, lower than its previous forecast of 1.6%, and hinted at greater challenges facing the economy.

Political turmoil drags down consumption, fiscal policy may follow suit

The political situation of the South Korean government has experienced severe turbulence in the past few months, leading to unclear policy directions and further undermining market and consumer confidence.

Data shows that the South Korean consumer confidence index has been in a pessimistic zone for three consecutive months, indicating a weak consumer recovery. KB Securities economist Gweon Heejin said:

Consumption is still in a sluggish state, and market uncertainty remains high. The private sector is difficult to recover independently, and government fiscal spending will be the key to preventing further economic slowdown

Currently, South Korean Acting President and Finance Minister Choi Sang mu is pushing for fiscal stimulus measures to address the slowdown in economic growth. The main opposition party in South Korea, the Democratic Party, has proposed an additional budget of 35 trillion Korean won (approximately 24 billion US dollars) to support economic recovery.

The Governor of the Bank of Korea, Lee Chang yong, previously stated in an interview that the additional budget should be between 15 trillion and 20 trillion Korean won to compensate for the economic losses caused by martial law.

US tariff plan hits South Korean exports, technology industry suffers

At the same time, the uncertainty of US trade policy is also one of the major challenges facing the South Korean economy. Last week, Trump announced plans to impose tariffs of approximately 25% on the semiconductor, automotive, and pharmaceutical industries, while maintaining the previous 25% tariffs on steel and aluminum, as well as a 10% tariff on imported products from all Asian countries.

The South Korean economy heavily relies on exports, with manufacturing deeply embedded in the global supply chain, and any trade restrictions could pose a threat to its growth. In January, South Korea's exports of technology products shrank for the first time in over a year. Although the adjusted total exports continue to grow, the trade outlook still faces challenges.

Market expects three more interest rate cuts by 2025, focusing on future policy guidance

Bloomberg economist Hyosung Kwon predicts, "Looking ahead, we expect the Bank of Korea to cut interest rates three more times in 2025, each by 25 basis points, bringing the benchmark rate to 2.00% by the end of the year. However, if the Korean won depreciates significantly, the pace of interest rate cuts may slow down

The market generally expects that the next interest rate cut by the Bank of Korea may be in May, and the specific decision still depends on the global trade environment, the trend of the Korean won exchange rate, and domestic economic data.

Bank of Korea Governor Lee Chang yong will hold a press conference later on Tuesday to address market questions about the future path of interest rates and disclose how many members hold different opinions on this resolution.

Editor's viewpoint:

The decision of the Bank of Korea to cut interest rates reflects the economic pressure brought about by political uncertainty and trade concerns. Although interest rate cuts may help boost consumption and investment, trade restrictions remain the biggest obstacle to future economic growth in South Korea.

In addition, if the Korean won continues to weaken, the Bank of Korea's room for interest rate cuts may be limited, which could force the government to further increase its fiscal policy efforts.

In the short term, the recovery of the South Korean economy will depend on the progress of fiscal policy implementation and the improvement of the global trade environment. However, against the backdrop of Trump's tariff plan continuing to ferment, South Korea's export prospects still face significant challenges.