The Bank of Korea (BOK) on Thursday cut its benchmark interest rate by a quarter percentage point to 2.5%, citing growing concerns over faltering domestic demand and rising external headwinds.
The central bank also lowered its 2025 growth outlook, now expecting a 0.8% GDP expansion, down from 1.5% growth projected in February.
The monetary easing marks the BOK’s second rate cut this year, following a 25-basis-point cut in February, and the fourth since last October – a more dovish pivot as policymakers confront the twin pressures of slowing household consumption and deteriorating export conditions, exacerbated by new US trade measures.
Analysts said the recent strengthening of the Korean won has also enabled the BOK to opt for an interest rate cut, with the currency staying below the 1,400-won level against the US dollar in recent weeks.
(Graphics by Daeun Lee) FURTHER EASING ON HORIZON
At a post-decision press conference, BOK Governor Rhee Chang-yong signaled further easing could be on the horizon.
“There is a possibility that the size of future rate cuts could exceed initial expectations,” he said.
He cited a steeper-than-anticipated deceleration in growth momentum, though he refrained from specifying a rate target for this year.
Thursday’s rate cut, passed unanimously by the rate-setting committee, brings total easing over the past eight months to a full percentage point, with each move in 25 bp increments.
Rhee confirmed that four of the six voting members favored keeping the door open to further cuts within the next three months.
BOK Governor Rhee Chang-yong (center) presides over a Bank of Korea rate review meeting on May 29, 2025 While turning more dovish than before, officials struck a cautious tone regarding the risks of overstimulating asset markets.
“There is a shared view among policymakers that excessive liquidity could flow into asset prices rather than boosting real investment,” said Rhee, pointing in particular to signs of renewed froth in Seoul’s housing market.
He warned that a premature or overly aggressive cut, such as a 50 bp “big cut,” could risk repeating policy missteps made during the pandemic-era easing.
ECONOMIC CLOUDS DARKEN
On Thursday, the BOK also lowered its GDP forecast for next year to 1.6% from its February projection of 1.8%.
The central bank maintained its inflation forecast for this year at 1.9% but lowered its projection for next year’s inflation by 0.1 percentage point to 1.8%.
While headline inflation has continued to cool, Rhee noted that upside and downside risks remain in play, and pledged to remain data-dependent in calculating the pace and scale of future easing.
“Domestic demand is projected to contribute 0.8 percentage point to this year’s growth, while net exports are expected to have a neutral effect,” said the BOK governor.
Korean exports struggle due to growing external uncertainty Next year, he said net exports could drag growth by as much as 0.3 percentage point, raising questions over the sustainability of any rebound.
The governor also warned of rising concerns about financial stability, particularly about household debt and real estate.
“The risk that monetary easing could fuel household borrowing or trigger asset bubbles remains high,” he said.
The governor urged close coordination with the incoming government to ensure that the central bank’s rate policy does not unduly stoke property markets.
Thursday’s GDP forecast for this year factored in only the first round of planned fiscal stimulus, he said.
"Private consumption will likely hit bottom in the first quarter and gradually increase," he said. "I expect the construction market to hit bottom in the second half and then start to rise as excessive investment in parts other than Seoul and regional areas is gradually resolved."
Bank of Korea's headquarters in Seoul PRESIDENTIAL ELECTION
Thursday’s rate cut and slashed GDP outlook come five days ahead of the country's presidential election and amid growing external uncertainty stemming from Washington's sweeping tariff scheme.
In the first quarter, Korea's GDP contracted 0.2% from the previous quarter –the first on-quarter contraction in nine months.
The unexpected contraction came as former President Yoon Suk Yeol's imposition of martial law in December caused political chaos and dampened consumer spending. Yoon was removed from office last month and a subsequent presidential election is scheduled for June 3.
Washington's sweeping tariff measures have also affected Korea's trade-dependent economy. US President Donald Trump earlier announced reciprocal tariffs, including a 25% levy on Korean goods, though the implementation was later postponed for 90 days.
Trade negotiations are underway between Korea and the US as the two sides have agreed to work toward a "July package" deal addressing trade and related issues, aiming to reach an agreement before July 8.
