The Bank of Korea is expected to resume interest rate cuts soon. Experts predict that the Bank will lower the base rate to 2.50% per annum at the Monetary Policy Committee meeting scheduled for the 29th. They also expect that the Bank will implement one or two additional cuts thereafter, lowering the base rate to the low 2% range by the end of the year.
Concerns over slowing economic growth are cited as the main factor for the interest rate cut. Experts predict that in the upcoming 'revised economic outlook,' the Bank will significantly lower this year's growth rate forecast.
◇ “Serious decline in exports, sluggish domestic demand, and reduction in investment… stimulus needed"
A survey conducted by ChosunBiz on 11 macroeconomic and bond experts from domestic securities firms revealed that all respondents expect the base rate to be lowered from the current 2.75% to 2.50% at the Bank's upcoming Monetary Policy Committee meeting on the 29th. If this forecast holds, the Bank will have cut rates twice this year, including a 0.25% point cut in February.
Experts noted that the domestic economy is facing a 'triple whammy' of export slowdown, sluggish domestic demand, and reduced investment. Yoon Yeosam, a research fellow at MERITZ Securities, said, “After the first-quarter growth rate recorded a negative (-0.2%, compared to the previous quarter), the risk of economic decline has expanded due to the second-quarter export contraction caused by U.S. tariffs,” adding that he expects the Bank to unanimously decide to cut rates at this Monetary Policy Committee meeting.
In fact, economic indicators are already sounding alarm bells. According to the Korea Customs Service, exports from the 1st to the 20th of this month totaled $32 billion, a decrease of 2.4% compared to the same period last year. The main reason was a 6.8% drop in exports to the U.S. due to uncertainties surrounding the tariff policy. Exports of most items, excluding semiconductors and vessels, saw a rapid decline.
Consumption and investment are also on the decline. According to the industrial activity trends announced by the Statistical Office at the end of last month, the retail sales index in March decreased by 0.3% as sales of durable goods contracted, while facility investment and construction output decreased by 0.9% and 2.7%, respectively. Considering that these indicators were announced before the U.S. tariff policies were directly reflected, the April index is expected to worsen further.
On the other hand, factors that could induce financial instability, such as household debt and exchange rates, have begun to stabilize. The exchange rate between the won and the dollar, which soared to 1,486 won at the end of December last year, has remained around 1,380 won since mid-month. On the 21st, it even fell to 1,368.9 won during after-hours trading. Although household loans in the financial sector have expanded due to the temporary lifting of the land transaction approval system, the Bank's view is that a slowdown is highly likely in the second half of the year.
Moon Hong-cheol, a researcher at DB Financial Investment, noted, “In light of the severe domestic demand slump and the insufficient effects of existing rate cuts, as well as the current falling exchange rate, they will take this into account at this Monetary Policy Committee meeting.” Kim Seong-soo, a researcher at Hanwha Investment & Securities, also said, “The stable inflation and foreign exchange market environment will support the Bank's proactive monetary policy.”
◇ Additional cuts by August… Six experts predict final rate of 2.25%"
The majority of experts believe it is highly likely that the Bank will skip the July meeting and implement an additional cut in August. They predict that the Bank will decide whether to cut rates after examining the impact of the early presidential election and the results of the Korea-U.S. tariff negotiations on the economy. Particularly, the expectation of additional cuts in August has increased due to the likelihood that the new government's stimulus policies, including the second supplementary budget, will get underway in the third quarter.
Kong Dong-rak, an economist at DAISHIN SECURITIES, stated, “As concerns about slowing growth are growing, additional monetary easing will be necessary with this interest rate cut, and I expect further rate cuts in August when the new government's policy measures are implemented.”
On the other hand, there are opinions that the timing for additional cuts could be pushed back even further. Shin Eol, a researcher at Sangsangin Investment & Securities, remarked, “The next rate cut will likely take place in the fourth quarter after the second supplementary budget is implemented in the third quarter,” adding that due to the delay in rate cuts by the U.S. Federal Reserve, the Bank is expected to proceed with the cuts quite slowly.
Views on the year-end interest rate level varied. Among 11 experts, six forecasted a final rate of 2.25% by year-end, while the others predicted 2.00%. Assuming the rates are cut by 0.25% points each time, six expect one additional cut, while the others expect two cuts.
Jo Yong-gu, a researcher at Shinyoung Securities who predicted one cut, stated, “Concerns about household debt and overheating in the metropolitan real estate market may resurface,” adding that “if there are no additional downward adjustments in the August economic outlook, there may be calls to conserve policy capacity within the Monetary Policy Committee.”
Baek Yoon-min, a researcher at Kyobo Securities who predicted two cuts, forecasted, “As the likelihood of this year's growth rate falling below 1% increases and the downward pressure on the economy heightens, it is expected that the Bank of Korea will need a more proactive monetary policy to defend the economy.”
◇ This year's growth rate, expert average at 0.9%… significant downward adjustment unavoidable
The Bank will also announce the 'revised economic outlook' containing its forecasts for economic growth and inflation rates at this month's Monetary Policy Committee meeting. In February, the Bank projected this year's gross domestic product (GDP) growth rate at 1.5% and next year's growth rate at 1.8%. It also expected the consumer price index (CPI) inflation rate to be 1.9% for both this year and next year.
Experts expect the Bank's growth rate forecast for this year to be significantly lower. Among the 11 experts, three expect it to be between 1% and 1.1%, while the other eight predict it to be below 1%. The average is 0.9%, with a maximum estimate of 1.1% and a minimum of 0.7%. For next year's growth rate, four experts predict 1.7%, while two each expect it to be 1.5%, 1.8%, and 1.6%. One expert predicts it to be 1.9%.
Ahn Ye-ha, head researcher at Kiwoom Securities, stated, “In response to the domestic export slowdown and prolonged domestic demand slump caused by U.S. trade policies, we will drastically lower our growth rate forecast.” Ahn Jae-kyun, a researcher at Shinhan Investment & Securities, also noted that “a downward adjustment in growth rate due to the decline in export growth following tariff measures is unavoidable,” stating that while stimulus effects from fiscal and monetary policies like supplementary budgets and interest rate cuts are expected, these would only be reflected in the revised economic outlook in August.
There were also varying forecasts regarding inflation. For this year, six experts predicted that the Bank will maintain its forecast at 1.9%, with two predicting 1.8% (upper limit), while 1.7%, 2.0%, and 2.1% each had one prediction. For next year's inflation, 1.9% was the most cited estimate with seven votes (upper limit), followed by two predictions for 2.0% and one each for 1.7% and 1.8%.
Shin Eol, who expects the Bank's inflation rate forecast to remain at 1.9% for both this year and next, explained that “consumer expectations for inflation are maintaining a stable trend.” Baek Yoon-min, who provided the same forecast, also added, “Domestic prices are expected to remain generally close to the target level (2.0%).