SEOUL: South Korea’s central bank cut interest rates Thursday in a bid to cushion the export-dependent economy from US President Donald Trump’s tariff war, as it almost halved its annual growth forecast.
Decision-makers lowered the benchmark interest rate “from the current 2.75 per cent to 2.5 percent” and predicted the economy would expand just 0.8 percent this year, down from the 1.5 percent projected in February.
Asia’s fourth-largest economy grew less than expected in the first quarter as the export giant and semiconductor powerhouse reeled from trade tensions and political chaos at home sparked by then-president Yoon Suk Yeol’s brief imposition of martial law in December.
The rate cut, which was flagged in April by bank governor Rhee Chang-yong, takes borrowing costs to their lowest level since October 2022. Rhee told a news conference that the current economic downturn was more severe than the 2008 financial crisis.
“During the global financial crisis, the probability of negative growth was estimated at around five percent. Now, that likelihood has risen to nearly 14 percent on average,” said Rhee.
The growth projection also marks the first time in five years that the central bank has estimated less than one percent, which was last seen during the pandemic, and will be a key issue for the country’s next president after an election next week.
South Korea economy barely grew in Q4; BOK to cut rates in February: Reuters poll
South Korea was hit with a 25 percent across-the-board tariff by the United States on April 2, though they were soon reduced to a base rate of 10 percent for 90 days.
However, 25 percent sector-specific levies on automobiles, steel and aluminium remain in place.
“Future economic growth trajectory is assessed to be subject to significant uncertainty, stemming from developments in trade negotiations, government stimulus measures, and monetary policies in major economies,” the BOK said in a statement.
“Inflationary trends also remain highly uncertain,” it added.
Jin Choi, an economist at HSBC, said in a note that it was “hard to find bright spots in Korea’s growth”.
The country’s “GDP growth has largely moved sideways at best over the past four quarters, with the first quarter of this year… showing a surprise contraction”, he added.
Exports, he warned, “remain on a weakening path with little sign of front-loading, and we do not expect to see a meaningful improvement in the near term”.
But “the election of a new president next week should lead to the introduction of much-needed fiscal stimulus”, said Gareth Leather, a senior Asia economist at Capital Economics.
South Korea’s exports fell 2.4 percent year-on-year in the first 20 days of May, partly because of weak sales to the United States.
Seoul has been holding ministerial-level talks and working-level technical discussions with Washington to secure full tariff exemptions by finalising a trade package by early July.
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