BOK expected to lower policy rate to 1.75% by year-end: Fitch

Jeremy Zook, lead Korea sovereign analyst at Fitch Ratings, left, and Pak Jeong-min, senior director of APAC corporates at Fitch Ratings, at a press meeting at a hotel in Seoul, Friday. Korea Times photo by Lee Yeon-woo

The Bank of Korea (BOK) is expected to lower its policy rate to 1.75 percent — a 100 basis point decline from the current 2.75 percent — by the end of this year, Fitch Ratings said Friday.

"With inflation well under control. I believe the potential economic slowdown should be given greater weight, especially when weighed against concerns over rising household debt," Jeremy Zook, lead Korea sovereign analyst at Fitch Ratings, said Friday at a press meeting in Seoul.

"High global policy uncertainty around trade may also dampen domestic demand through the investment channel, as firms may push back investment plans waiting for greater clarity on global trade prospects," he added. "Still, domestic consumption should gradually recover as the BOK continues to cut rates in our forecasts."

Last week, Fitch lowered its 2025 growth forecast for Korea to 1.0 percent, a 0.3 percentage point decline from its March projection. The revision reflected the sharp escalation in the U.S. tariff rates, and aligns with downward growth adjustments in most major economies, the agency explained.

"Fitch assumes a baseline effective U.S. tariff rate of 15 percent, which combines the 10 percent base tariff rate with sectoral tariffs, particularly in the auto and steel sectors in which Korea has high exposures to the U.S. market," Zook said.

Pak Jeong-min, senior director of APAC corporates at Fitch Ratings, noted that while most automakers are currently depleting inventory to endure, there is a strong likelihood of price increases in the medium- to long-term. This could weaken consumer sentiment, putting sales under additional pressure, she said.

The U.S. market accounts for a quarter of Hyundai Motor's total revenue, with more than half of that volume produced in Korea.

However, while Korea is significantly exposed to escalating global trade tensions, Fitch maintains that Korea’s sovereign rating remains resilient.

"We expect Hyundai's new production plant in Georgia to help mitigate the negative impact of the tariffs in the medium- to long-term," Pak said. "We also expect a weaker Korean won to help mitigate negative effects to some degree."

It also highly evaluated the Constitutional Court’s decision earlier this month to uphold the impeachment of former President Yoon Suk Yeol, which contributed to a gradual easing of political uncertainty, the agency said.

In its upcoming rating review for Korea, a key factor will be the medium-term fiscal outlook, according to Fitch. Clarity is likely to remain limited until the new administration outlines its fiscal strategy following the presidential election on June 3.

There are also concerns about a sharp upward trend in the government debt ratio.

"The consolidated fiscal deficit this year is likely to be wider than our 1.0 percent of GDP forecast in February, following the recent supplementary budget proposal and a possibility of a further supplementary budget following the election," Zook said.