South Korean Central Bank Lowers Interest Rate, Cuts 2025 Economic Growth Projection
South Korea Slashes Growth Forecast and Cuts Interest Rates Amid Trade Tensions
In a move aimed at bolstering the export-reliant economy, South Korea's central bank, the Bank of Korea (BOK), reduced its benchmark interest rate and downgraded its 2025 growth projection to a meager 0.8%. This stark contrast is a significant decline from the previous forecast of 1.5%, indicating a slowdown that exceeds the country's estimated potential growth rate of 2%.
The decision-makers at the BOK lowered the key policy interest rate from 2.75% to 2.5% following a prediction of less-than-expected growth in the first quarter of the year. This slow growth has affected South Korea's status as an export giant and semiconductor powerhouse, weakening amid trade tensions and domestic political chaos sparked by former president Yoon Suk Yeol's brief imposition of martial law in December.
Bank governor Rhee Chang-yong anticipates the current economic downturn to be more severe than the 2008 financial crisis, with the probability of negative growth estimated at nearly 14%. This rate cut marks the fourth in the current cycle, positioning the BOK as proactive amid persistent economic pressures.
The new growth projection represents the first time in five years that the central bank has estimated less than one percent, an event last seen during the pandemic. It will likely be a crucial issue for the country's next president, who will be elected next week.
The BOK indicates that future economic growth remains uncertain, given the state of trade negotiations, government stimulus measures, and monetary policies in major economies. Additionally, inflationary trends remain highly unpredictable.
Other institutions, such as the IMF and the OECD, present slightly more optimistic outlooks for South Korea's 2025 growth, at 1% and 1.5% respectively. However, these forecasts are still modest, mirroring global economic caution. The Korea Development Institute echoes this pessimism with a projection of 0.8% growth, highlighting a challenging year ahead for South Korea's economy.
Trade tensions and heightened uncertainties, particularly due to U.S. tariff policy, sluggish consumption, and slowing export growth, have contributed to the bank's pessimistic outlook. Furthermore, ongoing weakness in the construction sector poses additional challenges to South Korea's economic performance.
Finance sector analysts should brace for potential challenges in forecasting growth, given the Bank of Korea's revised projection of a 0.8% expansion in South Korea's economy by 2025. The industry, especially the export-oriented sector, may experience increased volatility due to trade tensions and uncertainty in international policies.
