The Bank of Korea surprised investors by cutting its benchmark interest rate Thursday after delivering gloomier growth forecasts in a back-to-back move following its policy pivot last month.
The central bank lowered its seven-day repurchase rate by a quarter-percentage point to 3% in a possible early response to growing trade and economic concerns following Donald Trump’s presidential election.
The BOK lowered its growth projection for 2025 below 2%, a factor that may have prompted the unexpected move. The central bank now sees the economy expanding 1.9% next year compared with a 2.1% projection in August.
Government bond yields dropped, stocks edged up and the Korean won weakened against the US dollar.
“You should see this as a pre-emptive response to an inevitable slump in investment and consumption should the economy chill next year with Trump targeting US trading partners from China to South Korea,” said Lee Seung-suk, a researcher at the Korea Economic Research Institute, following the move. “The BOK probably also considered the rising burden of debt among households and corporations. So it was an unexpected cut, but it wasn’t necessarily an early cut.”
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A rate cut by BOK Governor Rhee Chang-yong’s board was predicted by only four of 22 economists surveyed by Bloomberg. The other 18 expected the bank to maintain the rate at 3.25% and assess the impact of its October pivot when the BOK trimmed rates for the first time in more than four years.
A slowdown in the housing market, a cooling of inflationary pressure and a softening pace of export growth laid the groundwork for the cut this week. Trump’s victory also gave policymakers an incentive to consider ways to shore up South Korea’s trade-reliant economy against tariffs that could spike once he takes office.
“Since the US presidential election, amid emerging headwinds against exports we expect policymakers to have shifted their focus,” Nomura Holdings N33 economist Jeong Woo Park said before the decision. Park predicted the cut, citing “a worsening economic outlook and easing financial stability concerns.”
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The decision goes against the BOK’s general stance of refraining from back-to-back rate cuts unless there’s an economic crisis underway. The move underscores a sense of urgency among board members and shows the BOK is intent on becoming more agile if and when more volatility sweeps across the world economy.
Trump’s campaign promises included higher tariffs for trading partners and a potential rollback of subsidies for foreign companies operating on American soil, such as South Korea’s Samsung Electronics Co. and Hyundai Motor Co.
South Korea relies heavily on exports to sustain its economic momentum.
“Uncertainty in export performance around semiconductors is rising,” said Ahn Yea-ha, analyst at Kiwoom Securities Co., who forecast a hold. “Factors such as the imposition of tariffs on China following Trump’s election could heighten the risk of an economic downturn.”
South Korea’s public is increasingly concerned. The consumer outlook for the economy deteriorated at the fastest pace in more than two years in November, according to a BOK survey released this week.
Rhee will speak to reporters at a briefing starting shortly after 11 a.m. and provide the number of dissenters if any. He is also expected to disclose the board’s three-month outlook for rates.
