After 'a freeze like a cut' in January...
'a cut like a freeze' in February
Many variables for additional cuts...
Focus on exchange rate, U.S. economic policy, and supplementary budget direction
The Bank of Korea lowered the base interest rate by 0.25 percentage points on the 25th. The shadow of low growth deepened, and it was judged that the fog of domestic and international uncertainties and exchange rate volatility had somewhat lifted. This result also aligns with market expectations that 'after a breather with a freeze in January, a rate cut will occur in February.' This year's forecast for South Korea's economic growth rate was revised downward from 1.9% in November last year to 1.5% this month. This is lower than the 1.6?1.7% predicted during last month's mid-term review. The market interpreted the Bank of Korea's recent rate cut as a 'hawkish cut.' Additional cuts are expected to be made cautiously, considering the various scattered variables comprehensively.
Bank of Korea Governor Lee Chang-yong is striking the gavel at the Monetary Policy Committee plenary meeting held at the Bank of Korea headquarters in Jung-gu, Seoul, on the morning of the 25th. 2025.02.25 Photo by Joint Press Corps
After 'a freeze like a cut' in January... 'a cut like a freeze' in February
At the monetary policy meeting held on the morning of the day at the Bank of Korea headquarters in Jung-gu, Seoul, the Monetary Policy Committee announced that it had lowered the base interest rate to 2.75% per annum. This is a 0.25 percentage point reduction from the previous 3.00% per annum. This is the first time the base rate has fallen to the 2% range since October 2022, about 2 years and 4 months ago.
The Monetary Policy Committee began pivoting (a shift in monetary policy) for the first time in 3 years and 2 months last October by lowering the base rate from 3.50% to 3.25% by 0.25 percentage points, followed by another 0.25 percentage point cut in November. Last month, the rate was held steady due to factors such as trade policy variables following the election of President Trump, political uncertainty after the December 3 emergency martial law, and the resulting sharp rise in the exchange rate, but this month it was cut again by 0.25 percentage points.
The main reason for this month's cut is downward pressure on the economy and concerns over a further downward revision of South Korea's economic growth rate. Both domestic demand and exports, the core pillars of the Korean economy, have turned red, strengthening calls to support economic stimulus through rate cuts. The Bank of Korea lowered its economic growth forecast for this year to 1.5% in its revised outlook. This reflects additional factors such as political uncertainty triggered by the emergency martial law situation and the resulting economic sentiment contraction, changes in U.S. economic policy following President Trump's election, and the base effect from the Korean economy's mere 0.1% growth in the fourth quarter of last year compared to the previous quarter. The Bank of Korea had previously lowered the growth forecast to 1.9% in November last year, reflecting the strengthening of U.S. protectionist trade policies, and then further revised it downward to 1.6?1.7% during last month's mid-term review.
The 'external variables' and 'exchange rate burden' that led to the rate freeze last month have relatively stabilized, creating an environment to focus on growth concerns. With limited expansion of additional political risks, the 'Trump uncertainty' has eased the strong dollar pressure, leading to a lull in the won-dollar exchange rate rise. At the end of last year, amid severe political turmoil and strong dollar pressure, the won-dollar exchange rate rose to 1,480 won, increasing volatility. Recently, it has remained below the 1,450 won level due to eased concerns over tariffs from the new U.S. administration. The market also expects the average exchange rate in the second quarter of this year to fall to around 1,410 won.
Many variables for additional cuts... Focus on exchange rate, U.S. economic policy, and supplementary budget direction
'January's freeze was a breather to assess the effects of the previous two cuts and to review domestic and international variables. If risk factors calm down, a rate cut will follow in February.' The market, which had been moving in anticipation of this month's rate cut, immediately focused on the 'next step' after confirming the expected outcome.
The market interpreted the Monetary Policy Committee's recent rate decision as a 'hawkish cut,' expecting the pace of additional cuts to be controlled. Both the relatively calm exchange rate and U.S. trade policy variables remain uncertain and could change rapidly at any time. Jaekyun Ahn, a researcher at Shinhan Investment Corp., said, "Since exchange rate volatility caused by domestic political risks and external factors such as Trump's policies is still significant, the exchange rate trend needs to be continuously monitored." The anticipated tariffs on automobiles and semiconductors from Trump, which could be announced earlier than the scheduled April 2 date, are also key factors in determining the interest rate path as major variables for the Korean economy.
After this month's cut, the timing of additional cuts will be decided while monitoring the supplementary budget (chugyeong) decision and inflation trends. The uncertainty over the size and timing of the government's economic stimulus measures was one of the factors that led to last month's rate freeze. The Bank of Korea maintained its consumer price inflation forecast for this year at 1.9%. It is expected to move within the Bank of Korea's inflation stabilization target (2.0%), but consumer prices exceeded market expectations last month following December, and the high exchange rate may still be reflected additionally in prices. Minju Kang, senior economist at ING Bank, forecasted, "The Bank of Korea will carefully monitor whether inflation slows down while observing the effects of the three rate cuts implemented since the end of last year."
Expectations that there will be only one additional rate cut this year, leaving the final rate around 2.5%, are gaining more weight than before. With this rate cut by the Monetary Policy Committee, the interest rate gap with the U.S. has widened to 1.75 percentage points. Experts predict that the U.S. Federal Reserve (Fed) will hold rates steady for the time being to assess inflation and employment conditions, and the Bank of Korea is also expected to adjust the pace of rate cuts accordingly.
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