Tariff Shock Leads to Base Rate Hold at 2.75%... Will It Be Cut in May? (Update)

Bank of Korea Keeps Base Rate at 2.75% Per Annum
Trump's Tariff-Induced Financial Instability "Needs Monitoring"
Expansion of Household Debt After Permit System Reversal "Requires Verification"
Downside Economic Risks Grow... Rate Cut Expected in May

The Bank of Korea has kept the base interest rate steady at 2.75% per annum. This decision took into account the unstable financial and foreign exchange market conditions sparked by tariff conflicts initiated by U.S. President Donald Trump. However, considering the increasingly pronounced shadow of low growth, the prevailing expectation is that a rate cut will be implemented in May.

Lee Chang-yong, Governor of the Bank of Korea, strikes the gavel to declare the opening of the Monetary Policy Committee meeting held on the 17th at the Bank of Korea headquarters in Jung-gu, Seoul. Photo by Joint Press Corps

On the 17th, the Monetary Policy Committee of the Bank of Korea announced at a meeting held at the Bank’s headquarters in Jung-gu, Seoul, that it would maintain the base interest rate at the current level of 2.75% per annum. This follows three consecutive 0.25 percentage point (25bp) cuts in October and November last year, and February this year, after which the committee took a pause.

The Monetary Policy Committee’s stance is to hold off on further rate cuts for the time being to observe market stability amid heightened volatility caused by sharp fluctuations in the exchange rate triggered by Trump’s tariff shocks. The won-dollar exchange rate fell to around 1,434 won after the removal of domestic political uncertainty following the impeachment of former President Yoon Seok-yeol on the 4th, but then surged to about 1,484 won within three trading days due to concerns over the expansion of the U.S.-China tariff war. Subsequently, after the U.S. granted a 90-day tariff exemption to approximately 75 countries excluding China, the exchange rate fluctuated around 1,420 won and dropped to about 1,410 won early in trading on the day of the announcement. The weekly closing exchange rate fluctuation this month reached as much as 60 won.

The expectation that the U.S. Federal Reserve (Fed) will not lower policy rates anytime soon also weighed on the decision. The Fed has indicated it will monitor economic conditions further before adjusting monetary policy. The upper limit of the U.S. policy rate is 4.50%, making the interest rate gap between Korea and the U.S. 1.75 percentage points at the upper bound. Jina Kim, a researcher at Eugene Investment & Securities, commented, "The mutual tariffs have been temporarily suspended, but related uncertainties remain high. Given the large exchange rate volatility and the Fed’s unchanged stance, there was little reason for the Monetary Policy Committee to take special action."

Recent instability in the real estate market following Seoul City’s reversal of the land transaction permit system also supported the decision to keep rates steady. The risk of household debt expansion has increased again due to price fluctuations in some areas, including Gangnam-gu. Although Seoul City has re-designated expanded land transaction permit zones, and the market appears to be stabilizing, the loan expansion resulting from the previous lifting of restrictions has yet to be confirmed. The Monetary Policy Committee sees the need for further verification regarding household debt sensitivity and the balloon effect in the metropolitan area.

The consensus is that the next rate cut will likely occur in May. This is because the downside risk to the economy has increased due to stronger-than-expected tariff measures. Following President Trump’s announcement of mutual tariffs, more foreign investment banks (IBs) have lowered their growth forecasts for Korea this year to below 1%. Experts predict that the deterioration in first-quarter growth and the Bank of Korea’s downward revision of economic outlook reflecting this will increase the likelihood of a rate cut. Professor Sungjin Kang of Korea University’s Department of Economics stated, "We need to observe the direct impact and magnitude of Trump’s tariffs on the domestic economy," adding, "The interest rate differential with the U.S. should also be considered when determining the timing of the next rate cut."