Policy pivot: Shoppers walk past a currency exchange sign in the Myeongdong district of Seoul. The South Korean won continues to edge down against the dollar, with losses of 0.6% for the day. — AFP
SEOUL: The Bank of Korea (BoK) delivered a widely expected interest-rate cut yesterday to help buffer the export-driven economy from Donald Trump’s sweeping trade tariffs and revive domestic activity after months of political turmoil eroded growth.
The central bank lowered its seven-day repurchase rate by a quarter percentage point to 2.5% yesterday and slashed its growth forecast for the current year to 0.8% from a 1.5% projection in February.
The rate cut, the fourth since the BoK began its easing cycle in October, was forecast by all 21 polled economists.
“The domestic economy is expected to see a marked slowdown in growth this year, even as inflation remains on a stable trajectory,” the central bank said in a statement after the decision as it reaffirmed its continued rate-cut stance to support the economy.
“Uncertainty surrounding the future growth path also remains elevated.”
The South Korean won continued to edge down against the dollar following the decision with losses of 0.6% for the day.
The nation’s three-year government bond yields also inched down.
The bank had long appeared ready to lower borrowing costs after the economy slipped into reverse in the first quarter with most recent indicators showing little sign of a rebound.
While the nation’s presidential election is just five days away, governor Rhee Chang-yong said in April that the decision in May had to stay neutral of politics and focus on the economy’s needs.
At the time all six board members were open to a rate cut within three months in what appeared to be a clear signal that action was coming this month.
“A downward revision of the growth forecast seemed inevitable due to the impact of tariffs and the slowing down of exports,” said Ahn Yea-ha, analyst at Kiwoom Securities Co.
“I expect the base rate to come down to 2.25% this year, with perhaps one more cut next year, bringing it down to around 2% in total.”
In addition to weak exports, subdued investment and faltering consumption pointing to an economy in need of support, the recent appreciation of the Korean won likely gave the central bank additional scope to resume monetary easing without stoking inflation.
The currency recently climbed to a seven-month high against the dollar, after months of volatility previously restrained the BoK’s options.
The presidential election on June 3 adds a layer of political sensitivity to the rate cut.
The vote follows the ousting of former President Yoon Suk Yeol in April, after his botched martial law triggered constitutional crisis and economic uncertainty.
Frontrunner Lee Jae-myung of the Democratic Party has pledged at least 30 trillion won in stimulus to support households and small businesses.
His conservative rival, Kim Moon-soo, said he would discuss a supplementary budget of around the same magnitude aimed at public welfare.
Bloomberg economist Hyosung Kwon said: “The prospect of aggressive fiscal stimulus under a new government following next week’s presidential election may reduce the pressure on monetary policy to carry the burden alone.”
The BoK and broader markets are closely watching which candidate takes office as their fiscal strategies will shape the central bank’s room to manoeuvre.
The parliament has already passed a 13.8 trillion won supplementary budget, aimed at supporting vulnerable sectors and buffering trade risks.
Execution of further measures will likely depend on the incoming administration.
“Until now, fiscal policy hasn’t played a very active role, so monetary easing has largely carried the burden of policy response,” Kiwoom’s Ahn said.
“If fiscal spending picks up in the second half of the year, we might still see growth of around 1%.”
Trade tensions remain a key risk for the economy even as doubts emerge over their legality.
Trump last month imposed a 25% tariff on all South Korean exports, one of the harshest levies placed on a United States ally, though the measure was later temporarily scaled back to 10% for 90 days.
Korean shipments of autos, steel and aluminium remain subject to additional duties, and Trump recently threatened to extend tariffs to Samsung Electronic Co’s mobile phones.
In the latest twist in tariff developments, the US Court of International Trade in Manhattan deemed many of the levies illegal on Wednesday in New York.
The Trump administration said it would appeal the ruling. Export growth has stalled in April, with the value of shipments adjusted for working-day differences slipping 0.7% from a year earlier.
The broader recovery also remains fragile as key sectors like auto and steel face lingering trade risks and uncertainty over US tariff policy. — Bloomberg
