"Bank of Korea Expected to Further Lower Base Rate to 2.0%"

Heungkuk Securities forecasted on the 30th that the Bank of Korea will further lower its base rate to around 2.0% by 2026. The analysis suggests that, in response to downward pressure on the economy, the Bank of Korea's monetary policy stance will remain accommodative for the time being.

Lee Changyong, Governor of the Bank of Korea, is striking the gavel and declaring the opening at the Monetary Policy Committee plenary meeting held at the Bank of Korea headquarters in Jung-gu, Seoul on the 29th. May 29, 2025 Photo by Joint Press Corps

The Monetary Policy Committee of the Bank of Korea lowered the base rate by 0.25 percentage points to 2.50% at its regular May meeting held the previous day. This marks the second rate cut this year, following the one in February. Since the "pivot" (policy shift) in October last year, it is the fourth cut. The committee's decision was unanimous.

Kim Jinseong, a researcher at Heungkuk Securities, stated, "Although the country is in the midst of a presidential election, the economic control tower has not been functioning effectively since the impeachment of the president." He added, "Due to a slump in domestic demand and sluggish exports, GDP contracted in the first quarter, and uncertainties in external economic conditions, such as U.S. tariff policies, are intensifying."

He explained, "Continuous and robust policy responses from the central bank are required to counteract downside risks to the economy." He further noted, "Regardless of the new government's future economic policy direction, the Bank of Korea appears committed to stimulating domestic demand through accommodative monetary policy and to preemptively creating favorable conditions for the expansionary fiscal policy expected in the second half of the year."

According to the "Economic Outlook Report (Indigo Book)" released on the same day, the Bank of Korea lowered its GDP growth forecast for this year from 1.5% to 0.8%, and for next year from 1.8% to 1.6%, a reduction of 0.2 percentage points. The downward revision for this year is based on the expectation that the contribution of net exports will shrink to around zero and that sluggish domestic demand, centered on construction investment, will persist.

Researcher Kim stated, "We expect the Bank of Korea's rate-cutting stance to continue into next year." He explained, "Despite constraints on domestic rate cuts, the outlook for 0% range growth driven by domestic demand stagnation and ongoing uncertainties in external trade policies suggest that negative trends will persist for a visible period."

He added, "We forecast domestic GDP growth rates of 1.0% for this year and 1.6% for next year. This reflects an expansion of fiscal spending by 30 trillion won plus alpha, and does not differ significantly from the Bank of Korea's revised outlook." He continued, "Based on this, we expect a phased rate cut to continue through the first quarter of next year. We project the terminal rate for 2026 to be 2.0%."