BOK likely to lower GDP growth forecast significantly to below 1%

Bank of Korea (BOK) headquarters in Seoul / Courtesy of BOK

The Bank of Korea (BOK) is expected to slash this year’s economic growth outlook for the country to below 1 percent, down significantly from the previous projection of 1.5 percent, hamstrung by anemic domestic demand, political uncertainty and the effects of "reciprocal" U.S. tariffs under the Trump administration, market watchers said Sunday.

Many expect the rate-setting monetary policy board of the central bank will cut the key rate by a quarter-percentage point to 2.5 percent during Thursday’s meeting, warranted by bleak trade outlook due to Trump tariff volatilities and years of slowdown in investment and domestic spending.

Another consideration is the recent strength of the Korean currency relative to the dollar, after months of weakness that fueled fears of plunging to as low as 1,500 won.

Household debt buildup is likely to soar in the second quarter due to temporary regulatory easing in February. However, a stronger tightening soon after will limit further debt growth from the third quarter on, coupled with more stringent debt service ratio (DSR) regulations.

BOK Gov. Rhee Chang-yong said during an April press conference that all board members were open to the possibility of a rate cut within three months.

“The Korean economy is expected to grow 0.8 percent this year,” said Jung Kyu-chul, a senior fellow at Korea Development Institute (KDI).

This is a significant downgrade from its previous forecast of 1.6 percent, made in February.

The state-run think tank is the first among Korean research institutes to forecast GDP to grow by less than 1 percent.

Of the 0.8-percentage-point cut, 0.5 percentage point is explained by external factors, including U.S tariffs, while the remaining 0.3 can be chalked up to internal factors, such as weak domestic demand in the construction sector, according to Jung.

KDI’s revised figure is far lower than the finance ministry’s forecast of 1.8 percent announced earlier this year.

The Organization of Economic Cooperation and Development (OECD) and the Asian Development Bank (ADB) both forecast a growth rate of 1.5 percent.

The International Monetary Fund (IMF) had the rate at 1 percent last month.

KDI maintains that Korea is experiencing persistent weakening of private consumption, particularly in service sectors including food and lodgings.

Corporate investment sentiment is also struggling, as evidenced by construction investment registering a drop of 3 percent last year, likely to be followed this year by a 4.2 percent decline.

Facility investment growth is expected to be limited to 1.7 percent due to heightened global uncertainty, despite recovering semiconductor demand.

KDI urged the central bank to cut key rates to tackle the extended economic downturn of the past few years, brought on by declining demand from within the country and abroad.

However, it still maintains that expanding fiscal spending needs caution.

“Further monetary easing is needed, whereas extra budgets should be implemented with caution,” KDI said.