Bank of Korea cuts policy rate to 2.5%, slashes 2025 GDP forecast to 0.8%

Bank of Korea (BOK) Gov. Rhee Chang-yong speaks during a press conference at the bank headquarters in Seoul, Thursday. Courtesy of BOK

The Bank of Korea (BOK) cut its key rate from 2.75 percent to 2.5 percent, Thursday, in a widely expected decision to stave off a deeper economic slump.

It is the fourth cut since last October, after the central bank began a monetary easing cycle on August 2021, as domestic demand remains sluggish and uncertainties stemming from Washington's tariff provocations weigh on industries. The decision was made unanimously.

The central bank also slashed the economic growth forecast for this year to 0.8 percent, down significantly from the previous estimate of 1.5 percent made in February, due mainly to flagging construction investments. In the first quarter, Korea's gross domestic product (GDP) contracted 0.2 percent from the previous quarter.

“This year’s growth will come in much lower than expected, stifled by the yearslong construction boom that led to immense unmet supply, particularly in regions outside Seoul,” BOK Gov. Rhee Chang-yong said during a press conference at the bank headquarters in Seoul.

He hopes that the ongoing economic downturn will bottom out in the latter half of the year, translating to what the central bank expects to be a strong statistical rebound in the GDP figures.

“The central bank is in a bind," he said. "It is between the need to reinvigorate the economy in a policy mix of fiscal spending and monetary easing, and to help not repeat the past missteps."

The extreme volatility in the global trade and tariff uncertainties will continue, as evidenced by a U.S. federal court blocking President Donald Trump's reciprocal tariffs under emergency powers law earlier in the day.

“We essentially have to revisit the previous scenario whereby Korea’s exports growth outlook was assumed to be substantially clouded by the tariff policies. We will make adjustments in making estimates on the economic growth trajectory,” he said.

Rhee ruled out an immediate need to implement a 50-basis-point cut, a step widely advocated for by many market watchers, to maintain caution against a rapid buildup of household debt.

“We are currently in an easing cycle. A faster and sharper cut requires in-depth consideration for asset price growth possibilities, given the current liquidity conditions are not as tight,” he said.

A monetary easing-induced liquidity supply will more likely accelerate asset price increases, rather than spur economic recovery or corporate investment, as seen during the COVID-19 pandemic, according to the BOK governor.

“This is why we decided against the so-called ‘big cut,’ a move that would have fueled the household debt, undermining financial stability. All rate-setting members of the monetary policy board agreed on the need to closely monitor the pass-through impact of the rate cuts on property prices, especially in the Seoul metropolitan area," he said.

The recent sharp appreciation of the Korean won relative to the U.S. currency was underpinned by investor expectations on the U.S. foreign exchange authorities’ need to seek a weaker dollar to bolster exports, coupled with rapid political stability in Korea after the removal of former President Yoon Suk Yeol. Yoon was impeached over his Dec. 3 martial law declaration.

“The U.S. and several Asian economies discussed tariffs and exchange rates early this month in Milan, Italy, during an Asian Development Bank meeting,” he said. “However, the details of the discussion vary and I’m not in a position to disclose any specifics at this time.”

Rhee said Korea's political uncertainty has returned to a normal level similar to last November's. "The Korean won will recover to a normal level, up from previous wildly undervalued level," Rhee said.