The Bank of Korea's Monetary Policy Committee has lowered the base interest rate to 2.50% per annum. As the uncertainty both domestically and internationally increased the possibility of this year's growth rate plummeting to the 0% range, it has taken measures to stimulate the economy. The recent decrease in the won-dollar exchange rate, which had soared to the mid-1400 won range due to martial law and mutual tariffs imposed by the United States, has also contributed to this downward stabilization, as it recently fell to around 1360 won.
The market predicts that the Bank of Korea will consider the timing for an additional rate cut in August. Following the launch of the new government next month, it is likely that economic policies aimed at stimulating the economy will be pursued, and as there is a possibility that tariff negotiations between the U.S. and major countries will wrap up around July, the Bank of Korea is anticipated to consider the changes in domestic and foreign conditions before implementing interest rate cuts.
◇ Bank of Korea's Monetary Policy Committee lowers the base interest rate to 2.50%… Resuming the rate cut trend
The Bank of Korea's Monetary Policy Committee unanimously decided to lower the base interest rate to 2.50% per annum during a regular meeting held on the 29th. After consecutively lowering the rate in October and November of last year, the Bank of Korea alternated between holding (January), lowering (February), and holding (April) this year to reduce the interest rate to 2.75% per annum, so this decision has resumed the rate cut trend that had stopped since February this year.
The market atmosphere suggests that this rate cut was somewhat expected. A survey conducted by the Korea Financial Investment Association among 100 bond holders and operators between the 16th and 21st found that 69% of respondents anticipated a rate cut. This figure is a 57 percentage point increase compared to the previous survey conducted in April.
This decision was influenced by the slowdown in economic growth. Korea's real gross domestic product (GDP) growth rate recorded -0.2% (compared to the previous quarter) in the second quarter of last year, followed by a series of 0.1% growth rates in the third and fourth quarters. However, the risk of reciprocal tariffs from the United States has caused a contraction again in the first quarter of this year (-0.2%). Consequently, national research institutions such as the Korea Development Institute (KDI) have evaluated that indicators signaling economic slowdown are emerging.
The easing of exchange rate uncertainties that had previously held back rate cuts was also cited as a reason. Exchange rates soared to 1487.60 won on April 9, when the U.S. imposed reciprocal tariffs, but afterward, as progress was made in U.S.-China and U.S.-Japan tariff negotiations, Asian currencies strengthened, leading to a corresponding appreciation of the won. On the 26th, the exchange rate fell to 1365.00 won during intraday trading, marking the lowest level in seven months.
Monetary Policy Committee members have also left the door open for additional rate cuts in the future. Of the six commissioners, excluding the governor, four agreed that the possibility of lowering the base interest rate below 2.50% within three months should be considered. The governor noted that "the four members believe it would be appropriate to stimulate the economy through additional rate cuts, as the economy has worsened more than expected," adding that "the remaining two members suggested that it would be better to decide on rate cuts while assessing the effects of the base interest rate reduction, changes in U.S. tariff policies, fluctuations in metropolitan real estate prices, and new government economic policies."
◇ Market anticipates one additional rate cut within the year… "Growth rate, conservative for Bank of Korea"
Despite the Bank of Korea's strong dovish stance, the market expects that even if the rate is cut further, the pace of cuts will not accelerate sharply. In particular, the market noted the governor's comment that "there is a low likelihood of the base interest rate falling below 2% in the short term." After the meeting, the governor responded to a question regarding whether his earlier statement that "expectations for a base interest rate in the 1% range should not be held" still holds valid.
Jo Yong-gu, a researcher at Shinyoung Securities, stated, “There was a view that the rate could drop to 1.75% by May next year, towards the end of the governor's term, but this is seen as excessive.” He also projected that there would likely be one additional rate cut within the year, with August being a significant possibility. He added that "the 4 to 2 ratio of commissioners who agreed on the need to keep the possibility of an additional rate cut within three months open and those who disagreed is typically indicative of pausing and then assessing the next step."
As the Federal Reserve has begun to adjust the pace of interest rate cuts, it appears that the Bank of Korea will have more time to coordinate the timing of its rate cuts. The governor explained that "when the U.S. implemented a GIANTSTEP (a 0.75% hike in the base interest rate all at once) 1-2 years ago, we had to follow unilaterally, but now, considering the pace of rate cuts by the Federal Reserve, we have significantly more room to conduct our own monetary policy."
In this regard, Woo Hye-young, a researcher at eBest Investment and Securities, stated that "(the governor's remarks) mean that we will decide on rate cuts based on domestic conditions regardless of the Federal Reserve's rate decisions," and noted that "the external situation does not warrant an urgent decision on (interest rate) policy in Korea."
There were also claims that the Bank of Korea's forecast of a 0.8% economic growth rate this year is overly conservative. If the actual growth rate exceeds the Bank of Korea's forecast, a significant rate cut will not be necessary. Kim Sung-soo from Korea Investment & Securities stated that "the 0.8% figure seems to be one that the Bank of Korea itself views as conservatively assessed," adding that "factors contributing to economic growth, such as the second supplementary budget, have not been reflected in this forecast."
In relation to this, the Bank of Korea predicted that the economic growth rate would rise by 0.1 percentage points due to the supplementary budget of 13.8 trillion won enacted earlier this month. With the new administration likely to push for a second supplementary budget, the Bank of Korea has not included this impact in the growth rate forecast. Lee Jae-myung of the Democratic Party of Korea stated that he would immediately organize a supplementary budget for economic recovery upon taking office, while Kim Moon-soo of the People Power Party has suggested a specific supplementary budget scale of 30 trillion won.
Meanwhile, following the Monetary Policy Committee's interest rate decision, the treasury bond yield rose across the board. In the Seoul bond market, the yield on three-year treasury bonds recorded 2.341%, up 2.7 basis points (1 basis point = 0.01 percentage points) from the previous trading day. The five-year and ten-year bond yields also closed at 2.500% and 2.760%, respectively, up 3.3 basis points and 5.4 basis points. Despite the interest rate cut, the Ministry of Economy and Finance announced plans to issue 18.5 trillion won in treasury bonds, causing the yields to rise. The won remained stable, with the weekly closing exchange rate at 1375.9 won, down 0.6 won from the previous day.