Bank of Korea Cuts Rates Again Amid Economic Uncertainty
The Bank of Korea (BOK) has lowered its policy interest rate by 25 basis points to 2.5%, marking its fourth cut in the current easing cycle. This decision comes as South Korea faces economic headwinds, including political uncertainty and the potential impact of tariffs. The rate cut, which brings the rate to its lowest level since August 2022, aligns with economists' expectations.
GDP Forecast Revised Downward
The central bank also revised its GDP forecast for 2025 downward to 0.8%, significantly lower than the previous estimate of 1.5%. The BOK cited concerns about declining economic growth and relatively stable inflation as reasons for the rate cut. Further rate cuts are being considered, contingent on monitoring domestic and external economic conditions.
Political and Economic Challenges
Political instability, stemming from the impeachment of former leader Yoon Suk Yeol, adds to the economic challenges. Additionally, potential tariffs from the U.S. further cloud the economic outlook. South Korean leaders are working towards a deal with the U.S. government before the July 8 deadline to address these trade concerns. A snap election is scheduled for June 3.
Economic Outlook
Capital Economics anticipates that the election of a new president will result in fiscal stimulus, boosting consumer spending. However, they believe this may not fully offset the impact of a struggling property sector and export disruptions, forecasting full-year GDP growth of 0.5%.
Market Reaction
Following the rate cut announcement, the Kospi stock index rose by 1.25%, while the South Korean won weakened by 0.71%, trading at 1383.40 against the dollar.