February 27, 2025
SEOUL – The Bank of Korea on Tuesday cut its benchmark interest rate by a quarter percentage point to 2.7 percent to prop up the slowing economy saddled with sluggish domestic demand and a growing list of obstacles in exports due to new US tariff policies.
The central bank’s move came after it froze the rate in January to gauge the impact of the two rate cuts made in October and November last year. The one-month pause also reflected concerns about the falling value of the Korean won against the US dollar.
The latest rate cut was widely expected by analysts, not because lingering worries about the foreign exchange market and other side effects of a rate cut were resolved, but because the central bank faced a bleaker growth outlook that required monetary action.
The BOK revised its growth outlook for 2025 to 1.5 percent, down from its previous forecast of 1.9 percent. Notably, Tuesday’s revised projection is even lower than the 1.6 percent level many analysts had expected the central bank to settle for.
The BOK’s 1.5 percent growth outlook is lower than the estimate of annual economic growth between 1.6 percent and 1.7 percent that is factored into its January rate freeze decision.
The extra cut in the growth forecast, therefore, suggests that Korea’s economic situation and related factors point to more obstacles ahead. The mix of growing uncertainties both at home and abroad is seen as a key negative factor that can hurt the growth of Asia’s fourth-biggest economy. The BOK cited the US tariff policies initiated by President Donald Trump and a continued slump in consumer spending amid the political turmoil triggered by President Yoon Suk Yeol’s short-lived martial law declaration in December.
Experts continue to express worries about the leadership vacuum in Korea at a time when it badly needs to deal with tough forthcoming trade negotiations with the US, especially higher tariffs on Korea’s key export items, and more friction linked to a global trade war.
The BOK said in a statement that its rate cut is aimed at mitigating downward pressure on the economy, citing signs of price stabilization and a slowdown in household debt.
There is no question that the BOK’s rate cut was an inevitable move to bolster domestic demand and mitigate the impact on exports. Yet, the burden of a high exchange rate — hovering around 1,430 won per dollar — remains a pressing concern.
Another concern is the wider gap in interest rates between Korea and the US. In February, the US Federal Reserve held interest rates steady in a range between 4.25 percent and 4.5 percent in a bid to curb stubborn inflation. Fed policymakers hinted that they would be cautious about additional rate cuts, assessing the job market and changes in prices. This means that a wider interest rate gap of up to 1.75 percentage points could result in further currency fluctuations.
Household debt could be another problem. Some experts caution that policymakers must keep a close watch on household debt in the coming months in connection with property market fluctuations.
The government’s recent move to relax land transaction restrictions in Seoul’s affluent Gangnam district has raised concerns over renewed instability in housing prices. Media outlets reported that prices are already rising in apartment complexes in the region, which could lead to speculative deals elsewhere in Seoul and other major cities.
Given the complexity of the economic challenges, Korea clearly needs far more than a rate cut. Rival parties must work out a compromise on the much-needed supplementary budget to revitalize the lackluster economy, and the government has to come up with policy measures that amplify the positive effect of the rate cut.