[Q&A] Lee Chang-yong "Growth Rate 1.5%, Additional Impact of US Tariffs... Need for 2-3 Interest Rate Cuts This Year"

February Monetary Policy Committee Press Conference
Lee Chang-yong: "Unanimous Decision on Base Rate Cut by All Committee Members"
Possibility of Additional Cuts Within 3 Months, 2 Out of 6 Members in Favor
Trump Tariff Impact Judged to Be Faster and Larger Than Expected
Growth Rate Forecast Could Rise from 1.5% to 1.7% with 15-20 Trillion Won Supplementary Budget

Lee Chang-yong, Governor of the Bank of Korea, said on the 25th, "The reason for lowering the growth rate forecast within a month is due to increased uncertainty in trade policies such as U.S. tariff policies since President Trump's inauguration," adding, "We reflected the increased uncertainty in the trade environment, such as the earlier-than-expected timing of tariff imposition and the possibility of higher tariff rates."

Lee Chang-yong, Governor of the Bank of Korea, is speaking at a press conference on the interest rate decision of the Monetary Policy Committee held at the Bank of Korea in Jung-gu, Seoul on the 25th. 2025.02.25 Photo by Joint Press Corps

At a press conference held after lowering the base interest rate by 0.25 percentage points that day, Governor Lee explained, "We judge that there is significant uncertainty depending on how major countries' trade policies, the U.S. Federal Reserve's (Fed) monetary policy direction, domestic political situations, and economic stimulus measures unfold," and "As the growth rate is expected to decline significantly this year, the Monetary Policy Committee unanimously decided to further lower the base interest rate to respond to the economy."

Regarding the possibility of additional base rate cuts, Governor Lee said, "Since we are in a rate-cutting phase, there was a consensus that it is necessary to lower rates a few more times, and the 1.5% growth forecast also reflects (the additional cuts)," adding, "The market's analysis that there is a possibility of 2 to 3 cuts including February is not different from what we assume." However, he added, "Regarding the timing, such as whether to cut once more in the first half of the year, we need to decide after observing various situations."

The forward guidance indicating the Monetary Policy Committee members' interest rate outlook within the next three months was split 4 to 2. Governor Lee stated, "Four members expressed the opinion that, given the large domestic and international economic uncertainties and concerns about the rapid depletion of room for further rate cuts, it is likely that the rate will be maintained," and "The remaining two members decided to keep the possibility of additional cuts open considering the downward pressure on the economy."

Regarding the forecast that South Korea's economy will grow by 1.5% this year, he said, "We probabilistically reflected the tariff effects of other major partner countries, the mutual tariffs scheduled for April, and tariffs on semiconductors, steel, automobiles, and pharmaceuticals in part of the growth rate," adding, "Since there are both upward and downward factors, 1.5% is a fairly neutral growth rate."

Below is a Q&A with Governor Lee.

- What is the forward guidance on the Monetary Policy Committee members' interest rate outlook within the next three months?

▲ Among the six Monetary Policy Committee members excluding myself, four said it is highly likely that the base rate will be maintained at around 2.75% within the next three months, while the remaining two said the rate should be open to levels lower than 2.75%. The four members were concerned about the rapid depletion of room for further rate cuts amid high domestic and international economic uncertainties, so they thought it would be desirable to maintain the current rate level for the time being and observe changes in conditions. The other two members, considering the downward pressure on the economy, thought it would be better to keep the possibility of additional cuts open and make judgments while observing changes in conditions. Although opinions differed on the timing of additional cuts due to concerns about the room for rate cuts, all six agreed that monetary policy is in a rate-cutting phase and that decisions should be made based on future conditions. I emphasize that all of this is conditional on the economic situation.

- Is there a possibility of several more rate cuts this year?

▲ The market seems to have a majority opinion that there will be 2 to 3 cuts including the February rate cut. When we forecast a 1.5% economic growth rate in February, we internally gauge monetary policy, and the market's forecast is not significantly different from what we assume. There are not many views that rate cuts should stop at the current level. Since we are in a rate-cutting phase, there is a consensus that it is necessary to lower rates a few more times, and the 1.5% growth forecast reflects (additional rate cuts). However, whether to act quickly or adjust while observing the situation depends on other economic factors and will be decided accordingly.

- Why was the economic growth forecast lowered to 1.5% this year?

▲ Due to the emergency decree, consumer sentiment weakened, and when we looked at data in early January, the economy was declining too rapidly, so we made an interim announcement. Since then, consumption and construction data have been poor, reflecting the decline in sentiment. Also, at the time of the January interim forecast, it was before President Trump's inauguration, so there was no information to assume tariff policies, but over the past month, significant aspects of Trump's tariff policies have emerged, so we reflected this and lowered the forecast compared to January.

- Please explain in detail how the U.S. new government's tariff policies were reflected in the growth rate.

▲ When assuming 1.5% growth, we reflected the tariffs on steel and aluminum that we have somewhat identified, as well as the tariff effects of other major partner countries. We judged that tariff imposition is faster and broader than expected. We thought the additional 10% tariff on China would affect our economy from the second half of this year, but it was understood to be affecting from the first quarter. Other countries were expected to impose tariffs from next year, but it seems they will affect from mid-year this year.

▲ The bigger impact is the mutual tariffs scheduled for April, and the 25% tariffs on semiconductors, steel, automobiles, and pharmaceuticals. We probabilistically reflected whether these will be implemented immediately or postponed in part of the growth rate. Some say this is not optimistic, but I consider 1.5% a fairly neutral growth rate. Even if mutual tariffs are imposed after April, implementation may be postponed, and if supplementary budgets are made, there are upward factors. There are both upward and downward factors.

- How much does the supplementary budget contribute to the growth rate?

▲ When predicting 1.5% growth, if the supplementary budget is set at 15 to 20 trillion won, it is expected to raise the growth rate by 0.2 percentage points. We see an effect of about 1.7%. A larger scale would have more side effects. The supplementary budget has a short-term effect of alleviating pain, but considering fiscal soundness, there are side effects. Also, if fiscal policy does not increase the stimulus effect next year, it will act as a negative effect. While it has the effect of slightly raising the growth rate to alleviate pain, I hope the supplementary budget is made with the recognition that structural problems must be fundamentally solved. In that sense, I hope it does not exceed 20 trillion won.

- If a large supplementary budget exceeding 35 trillion won is prepared, is there a possibility of revising the forecast for the number of base rate cuts?

▲ If the supplementary budget increases significantly contrary to our views, we will reflect it in the forecast and judge the best monetary policy direction under that situation. The supplementary budget is naturally decided by the government, and debates on its scale and content will likely be less heard from me once the situation in our country stabilizes. I hope political stabilization happens quickly so that such discussions become unnecessary.

- What is the growth effect of base rate cuts?

▲ Quantitatively, lowering the base rate by 0.25 percentage points can raise the growth rate by 0.07%. Considering the two rate cuts in the second half of last year, we judged and reflected a 0.15% growth effect. However, there is currently a lot of uncertainty, and political uncertainty has not disappeared, so the average effect through econometric models needs to be re-examined. Theoretically, since the U.S. has many long-term interest rate products, the effect of rate cuts may be greater in South Korea. However, due to remaining uncertainties, it remains to be seen whether rate cuts will directly lead to corporate investment or directly open consumers' wallets.

- How do you view side effects such as household debt increase due to base rate cuts?

▲ Currently, real estate prices in Seoul are rising rapidly mainly in areas where the land transaction permit system has been eased, but it does not seem to be spreading. Prices are actually falling in provincial areas. However, if the rate-cutting trend continues, we need to monitor closely. Rather than directly looking at real estate prices, the focus is more on how much household debt increases. Although it is undesirable for real estate prices to rise in specific areas due to eased regulations, I hope that reducing household debt relative to GDP becomes an important policy goal.

- You forecasted 1.8% growth next year, still in the 1% range. What does this mean?

▲ Personally, I would accept 1.8% growth and consider it a decent growth rate. Globally, economies are struggling due to Trump's tariff policies and growth rates are low, so I do not think we can grow above the potential growth rate (2%). We have become too accustomed to high growth in the past, and there is a widespread perception that 1.8% is a crisis or difficult, but I think we should accept it because we have not done structural adjustments and have relied on existing industries. If we lower rates and mobilize fiscal policy to achieve 1.8% growth, household debt will rise and the country will become more difficult. To raise the growth rate further, structural reforms are necessary. Of course, if growth falls below 1.8%, additional rate adjustments and fiscal policies should be considered. However, I do not agree that the figure 1.8% means it is very difficult and requires many measures.

- Should the environmental changes due to U.S. tariff policies be seen as temporary shocks that can be addressed by interest rate adjustments?

▲ It is not appropriate to respond only with interest rates. When there are additional factors, fiscal policy should be coordinated to respond. Ultimately, our country's industrial structure must change. Although we understand the economy as export-oriented, net exports have had zero impact on our economy over the past 3 to 4 years. This does not mean export industries are unimportant, but our competitiveness has declined significantly, so the era when exports caused a trickle-down effect has changed. Without the emergence of new industries beyond that, tariff impacts can be significant. Creative destruction is necessary, and someone must bear the pain, but social conflicts have been difficult to endure, so new industries have not been introduced in the past decade. I hope that structure changes.