BOK cuts key rate to 2.5 pct as S. Korea’s GDP growth forecast dims

South Korea’s central bank lowered its benchmark interest rate by a quarter percentage point Thursday, just five days ahead of the country’s presidential election, in an effort to prop up economic growth amid sluggish domestic demand and uncertainties stemming from Washington’s sweeping tariff scheme.

In a widely expected decision, the monetary policy committee of the Bank of Korea (BOK) slashed the key rate by 25 basis points to 2.5 percent at its rate-setting meeting in Seoul.

It marked the fourth reduction since October 2024, when the BOK began a monetary easing cycle for the first time since August 2021. Since then, the central bank has lowered the policy rate by a total of 1 percentage point through May.

At its previous meeting in April, the BOK held the policy rate steady, citing the need to support the weak local currency and assess the evolving impact of new U.S. tariff measures.

“Although concerns about household debt growth and an increase in volatility of foreign exchange markets still persist, the economic growth rate is forecast to decline considerably. The board, therefore, judged that it is appropriate to cut the base rate and mitigate downward pressure on the economy,” the BOK said in a statement.

Thursday’s rate reduction decision was unanimous, while four out of six board members voiced the need to keep open the possibility of further rate reductions in the next three months, BOK Gov. Rhee Chang-yong told a press conference.

The rate cut underlined the central bank’s policy focus on propping up growth, as it sharply lowered its 2025 real gross domestic product (GDP) growth forecast from 1.5 percent to 0.8 percent.

“There is a possibility that future rate cuts could be larger than initially expected, as economic growth momentum has weakened significantly more than we had anticipated,” Rhee said.

The sluggish growth has been driven mainly by downturns in the construction sector, private consumption and exports, though momentum is expected to begin recovering in the second half of this year, Rhee said, while pointing to “high uncertainty” regarding global trade environments.

The BOK forecasts the economy will expand by 1.6 percent next year.

In April, U.S. President Donald Trump announced reciprocal tariffs, including a 25 percent levy on South Korean goods, though the implementation was later postponed for 90 days.

Trade negotiations are under way between South Korea and the U.S., as the two sides have agreed to work toward a “July package” deal addressing trade and related issues, aiming to reach an agreement before July 8.

In the first quarter, the country’s GDP contracted 0.2 percent from the previous quarter, which marked the first on-quarter contraction in nine months.

The unexpected negative growth came as former President Yoon Suk Yeol’s imposition of martial law in December caused political chaos and dampened consumer spending. Yoon was removed from office last month, and a subsequent presidential election is scheduled to take place on Tuesday.

The recent strengthening of the Korean won enabled the BOK to opt for an interest rate cut, with the currency staying below the 1,400-won level against the U.S. dollar in recent weeks.

“The won-dollar exchange rate is being influenced by external factors, and volatility remains high,” Rhee said.

The latest rate cut decision widened the gap between the key rates of South Korea and the U.S. to as much as 2 percentage points.

A widening of the difference could lead to a depreciation of the Korean currency and raise the risk of capital outflows to overseas markets, according to experts.

Earlier this month, the U.S. Federal Reserve kept its benchmark interest rate steady at the 4.25-4.50 percent range, citing heightened economic uncertainty and rising risks of inflation, and the Fed has adopted a cautious stance on rate cuts.

When asked about discussions between Seoul and Washington regarding the foreign exchange market earlier this month, Rhee declined to provide details, simply saying that the talks themselves appeared to have contributed to the strengthening of Asian currencies.

On May 5, South Korea’s Deputy Finance Minister Choi Ji-young met with Assistant Secretary for International Finance at the U.S. Treasury Robert Kaproth to discuss currency issues on the sidelines of the 58th ADB Annual Meeting in Milan.

Rhee, however, cautioned against “hasty cuts” amid ample liquidity, admitting to policy “mistakes” made during the COVID-19 pandemic when liquidity flowed into real estate and other asset markets and fueled home prices, rather than promoting corporate investment or supporting the real economy as then policymakers had intended.

“Interest rate decisions should take into account their impact on housing prices in Seoul and surrounding areas, as well as on household debt. I hope the new administration and the central bank can find common ground on concerns about excessive liquidity potentially driving up real estate prices in specific regions,” he said.

Earlier this month, the National Assembly passed a 13.8 trillion-won (US$10 billion) supplementary budget. Additional fiscal outlays of the next government are expected to play a key role in shaping the BOK’s future policy path.

Front-runner Lee Jae-myung of the Democratic Party (DP) has pledged an additional budget of around 35 trillion won to support economic growth and improve livelihoods, while Kim Moon-soo, the candidate from the conservative People Power Party (PPP), has vowed approximately 30 trillion won in stimulus.