"Starting with May Economic Outlook" Implications of Governor Lee Chang-yong's Press Conference Remarks [BOK Focus]

One Member Supported a Rate Cut in April, Unanimous Agreement for a Cut Within Three Months
Situation Mirrors January's Pause Amid Heightened Uncertainty
Governor Lee Repeatedly Says, "First Confirm the May Economic Outlook"
Growth Rate Expected to Fall Well Below Previous Forecast
Market Focuses on 'May Growth Outlook Downward Revision + Rate Cut' Scenario

"With the change in the US tariff policy, it suddenly feels like entering a dark tunnel... In such a darkened situation, wouldn't it be better to adjust the speed and wait until it brightens."

The Bank of Korea's Monetary Policy Committee's decision on the 17th to keep the base interest rate unchanged (maintaining the annual rate at 2.75%) resembled the situation in January. It was a freeze in the interest rate cycle as a breather amid domestic and international uncertainties. The decision to keep the rate unchanged, the minority opinion of one member (Shin Sung-hwan) advocating a 0.25 percentage point cut, and the unanimous opinion for a conditional rate cut within the next three months also aligned in tone. The main factor leading to this month's rate freeze was the uncertainty in trade conditions revealed by the Trump-led tariff bombshell.

Lee Chang-yong, Governor of the Bank of Korea, is speaking at a press conference on the direction of monetary policy held after the Monetary Policy Committee decided to keep the base interest rate unchanged on the 17th. Bank of Korea

"First Confirm the May Economic Outlook"?Interpretation of the Deferred Judgment Statement

Lee Chang-yong, Governor of the Bank of Korea, repeatedly stated at the press conference on monetary policy direction held after the Monetary Policy Committee's rate decision on the 17th, "I will talk in more detail along with the May economic outlook announcement." While explaining the inevitability of downward revision of this year's growth rate in his opening remarks, he deferred judgment with answers such as "I will speak after confirming the May economic outlook" to questions about whether this year's growth rate would be lower than the pessimistic scenario (1.4% growth this year) forecasted in February, requests to share his view on the final interest rate level this year, and inquiries about the impact of the supplementary budget.

Primarily, this literally reflects the judgment that "it is difficult to predict the situation at this point dominated by uncertainty." Governor Lee said, "At present, the uncertainty is so great that it is difficult even to set a basic scenario for the outlook to predict the future growth path."

However, the direction of economic judgment was clear. He saw that South Korea's economic growth rate this year would inevitably fall below the February forecast of 1.5%. This is due to weak growth in the first quarter and the 'significantly strengthened' US tariff policy. In particular, in the first quarter of this year, both domestic demand and exports slowed, making negative growth a possibility. The Bank of Korea had forecasted 0.2% growth for the first quarter in its February economic outlook. Governor Lee cited prolonged political uncertainty delaying economic sentiment recovery, extraordinary factors such as large wildfires and suspension of some construction sites as reasons for the first quarter's weak growth.

Since "the baseline has not yet been established," there was no mention of exact figures, but it was also clear that this year's growth rate would be lower than the previous pessimistic scenario (1.4%). Governor Lee said, "Considering the US administration's tariff policy, even with mutual tariff exemptions, the scenarios forecasted in February were too optimistic regarding tariffs on China, item-specific tariffs, and the 10% basic tariff," adding, "The May outlook needs to reflect the tariff impact more significantly."

Weight Given to 'May Growth Outlook Downward Revision + Interest Rate Cut' Forecast

The market's 'May rate cut theory' gained more weight. Even though the Monetary Policy Committee decided to keep rates unchanged this time, it emphasized that the downside risk to growth has significantly increased. The similarity to the January Monetary Policy Committee situation also supports the view that rates will be cut next month. In January, amid concerns about low growth, the six Monetary Policy Committee members except Governor Lee had a three-month forward guidance leaning toward a rate cut, and a rate cut followed the downward revision of the growth outlook in February. Governor Lee also evaluated, "Since it is very likely that the growth forecast will be lowered in the May economic outlook, it would be good to keep the possibility of a rate cut open to respond appropriately by observing the revised forecast and the financial and foreign exchange market conditions announced in May."

However, variables such as financial instability and concerns about the interest rate gap between Korea and the US, which added weight to this month's freeze decision, need to be confirmed. Governor Lee said, "Whether exchange rate volatility decreases will depend on how countries ultimately respond to the US administration's tariff policy, how US inflation and growth change due to tariff policy, and how US monetary policy will unfold, as well as how quickly the remaining domestic political uncertainty is resolved." The won remains depreciated beyond fundamentals, likely influenced by the close trade relationship with China amid the US-China tariff war phase. Ultimately, whether the exchange rate has stabilized enough to support a rate cut and reached an 'appropriate level' can only be known by monitoring future developments.

Concerns about the interest rate gap between Korea and the US are also a burden. The US Federal Reserve (Fed) is expected to take a wait-and-see stance on economic conditions before adjusting monetary policy and is unlikely to cut policy rates for the time being. The US policy rate is 4.25?4.50%, making the upper bound of the Korea-US interest rate gap 1.75 percentage points. However, Governor Lee emphasized, "Although we will be influenced by (the burden of the Korea-US interest rate gap when deciding rates), we do not decide mechanically (just by looking at the numbers)."