The Bank of Korea's Monetary Policy Committee has resumed its rate-cutting trend, which had been halted since February, by lowering the benchmark interest rate to 2.50% per annum. This decision appears to be made considering the increased possibility of a slowdown in growth due to uncertainties in U.S. tariff policies and domestic political instability, along with the stabilization of the won-dollar exchange rate, which has reduced concerns over financial instability.
The Bank of Korea's Monetary Policy Committee (hereafter referred to as the MPC) lowered the benchmark interest rate to 2.50% during its regular meeting held on the 29th. The Bank had maintained the rate at 0.5% to 3.5% from August 2021 until January 2023, keeping it unchanged for 1 year and 7 months. It then consecutively lowered the rate in October and November last year and alternated between holding (January), reducing (February), and holding (April) this year, bringing the rate down to 2.75%.
The MPC stated in its monetary policy direction resolution, "Given that the growth rate is expected to decline significantly, we have determined that it is appropriate to further lower the benchmark interest rate to alleviate downward pressure on the economy," adding, "We will closely monitor changes in domestic and external policy conditions, along with related price trends and financial stability, to determine the timing and pace of further rate cuts."
Ahead of the MPC meeting, the market was foreseeing a cut in the benchmark interest rate. According to a survey conducted by the Korea Financial Investment Association from the 16th to the 21st, 69% of the 100 respondents, who are involved in bond holding and management, expected a rate cut. This figure represents an increase of 57 percentage points (p) from the previous survey in April.
The market cites the deepening downward pressure on the economy as a basis for the rate cut. Korea's real Gross Domestic Product (GDP) growth rate recorded -0.2% (compared to the previous quarter) in the second quarter of last year, and after sustaining a 0.1% growth rate, it faced another contraction in the first quarter of this year (-0.2%) due to domestic political instability and the tariff risks posed by U.S. President Donald Trump. Consequently, the Korea Development Institute (KDI) and other national research institutions have noted the emergence of indicators suggesting an economic slowdown.
The easing of uncertainties regarding exchange rates, which had been a hurdle to the rate cut, was also presented as a reason. The exchange rate surged to 1,487.60 won on April 9, when the U.S. imposed reciprocal tariffs, but afterward, as negotiations progressed regarding tariffs between the U.S. and China and the U.S. and Japan, Asian currencies strengthened, leading the won to stabilize lower. On the 26th, the exchange rate fell to 1,365.00 won during trading, marking its lowest level in seven months.
However, there is also a possibility that the interest rate may be frozen again in the future. Opinions suggest that the trend of rising housing prices and increasing household debt, which rebounded after the temporary lifting of the land transaction permit system earlier this year, should be monitored. According to the Korea Real Estate Board, as of the third week of this month (based on the 19th), the price of apartments in Seoul increased by 0.13% compared to the previous week, maintaining an upward trend for 16 weeks. The balance of household loans from the five major banks, including KB, Shinhan, Hana, Woori, and NH Nonghyup, recorded 747.7033 trillion won as of the 26th, an increase of 4.6185 trillion won compared to the end of last month (743.848 trillion won).
The cautious stance of the U.S. Federal Reserve (Fed) regarding interest rate cuts is also a consideration. According to the minutes of the Federal Open Market Committee (FOMC) meeting released on the 28th (local time), the commissioners generally agreed that, due to heightened economic uncertainty and increasing dual risks of rising unemployment and inflation, a more cautious approach to future interest rate adjustments should be maintained. As a result, the market is largely expecting that the interest rate will remain unchanged at 4.25% to 4.50% at the next FOMC meeting next month.
Jo Yong-gu, a researcher at Shinyoung Securities, noted, "The risks of household debt and overheating in the metropolitan real estate market may re-emerge," adding, "If there are no further downward adjustments in the economic outlook in August, there may be arguments within the MPC suggesting that they should conserve policy leeway."