Bank of Korea Cuts Interest Rate Amidst Weak Growth Projections

South Korea's central bank has cut its key interest rate by 25 basis points to 2.75%, bringing the total reduction to 50 basis points since October. The move, anticipated by economists, aims to stimulate the economy amidst forecasts of slowing growth.

The Bank of Korea (BOK) cited "projections that the growth rate will decrease significantly" alongside moderating inflation and household debt as key drivers of the decision. The BOK also expressed continued vigilance over foreign exchange conditions.

In a news release, the BOK pointed to a confluence of factors weighing on the economy, including "growing political uncertainty" stemming from President Yoon Suk Yeol's recent impeachment and subsequent wait for the Constitutional Court's ruling.

The BOK also highlighted waning exports and weak consumption as contributing to the slowdown, adding that "the world economy is facing expanding downside risks to growth and increased uncertainty in price channels due to the effect of U.S. tariff policies."

Following the rate cut, the BOK revised its economic growth forecast for 2025 down to 1.5%, a reduction from its previous forecast of 1.9%.

South Korea's economy has already shown signs of strain, with gross domestic product (GDP) growth clocking in at a mere 0.1% in the fourth quarter of 2024, culminating in a full-year expansion of 2.0%. This performance fell short of the BOK's initial projection of 2.2% growth.

The ongoing political turmoil, sparked by Yoon's impeachment and subsequent wait for a constitutional court ruling, has further dampened consumer confidence and weighed on economic activity.

Adding to the economic headwinds are the potential impacts of broad tariffs floated by US President Donald Trump. If implemented, these tariffs could significantly impact key sectors such as steel, automobiles, and semiconductors. Trump has proposed a 25% levy on all automobiles entering the US from April 2, and has also announced duties on steel imports, as well as plans for reciprocal tariffs on trading partners.

Seoul has requested exemptions from these measures, with the Trade Ministry issuing a statement in mid-February asserting that under the two countries' free trade agreement, the effective rate on imports from the US is "close to zero."