The Bank of Korea (BOK) is set to cut its base interest rate by 0.25 percentage points this Thursday, one month earlier than initially expected. This move comes as part of efforts to support South Korea’s struggling economy, which faces mounting political uncertainty and concerns about growth. According to a Reuters poll of economists, the rate cut will bring the base rate down to 2.75 percent, with 80 percent of the 34 economists polled forecasting this change.
Bank of Korea to Cut Interest Rate Sooner Than Expected
The South Korean economy is under pressure, grappling with political turmoil surrounding efforts to arrest impeached President Yoon Suk Yeol and the government’s decision to lower the 2025 growth forecast from 2.2 percent to 1.8 percent. Political instability, combined with high domestic household debt, has led to the Korean win weakening to its lowest point in nearly 15 years. This economic backdrop, alongside the threat of tariffs from U.S. President-elect Donald Trump, has fueled speculation that the U.S. Federal Reserve may slow its interest rate cuts in the near future.
Krystal Tan, an economist at ANZ, stated that the case for an earlier rate cut has grown stronger due to the political and economic uncertainties facing South Korea. However, concerns about the won’s weakness and financial stability remain key hurdles for the BOK’s decision-making.
A majority of economists also foresee additional rate cuts in the coming months, with predictions for a rate reduction in the second and third quarters of 2025, bringing the rate to 2.25 percent—considered the neutral rate. Despite this, some uncertainty remains regarding U.S. policy, particularly with Trump’s inauguration on January 20.
Experts like Jin Choi from HSBC note that South Korea’s subdued domestic demand recovery and consumer sentiment, worsened by political tensions, may lead the BOK to continue lowering rates. However, shifts in U.S. monetary policy could affect the bank’s ability to ease further.
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