South Korea cuts interest rates and lowers growth forecast.

Amid persistent political uncertainty and external trade pressures, the Bank of Korea announced on May 29 its fourth consecutive rate cut, sharply lowering the 2025 GDP growth forecast to 0.8%. This move brings the policy rate to its lowest since August 2022, highlighting the significant challenges faced by Asia's fourth-largest economy.

Following this policy meeting, the Bank of Korea reduced the benchmark rate by 25 basis points to 2.5%. This marks the fourth rate cut in the past six meetings, indicating a clear shift towards accommodative monetary policy. The central bank also stated that it would maintain its easing stance to alleviate downward pressure on economic growth and would dynamically adjust the pace and timing of further cuts based on changes in domestic and international policy environments.

Central Bank Governor Rhee Chang-yong stated, “If the growth outlook for 2025 further deteriorates, we will consider adopting additional rate cuts.”

Political Crisis and Tariff Risks Intensify Economic Pressures

South Korea is currently in a sensitive period of dual political and trade shocks. In December last year, former President Yoon Suk-yeol was impeached and removed from office for attempting to enforce martial law, leading to prolonged political turmoil. An early presidential election is set for June 3, and the new administration is expected to swiftly introduce fiscal stimulus measures to boost weak economic confidence.

Meanwhile, trade pressure from the United States continues to escalate. The Trump administration announced a 25% “reciprocal tariff” on South Korea, which is temporarily deferred for 90 days, but with the July 8 implementation deadline approaching, failure to reach a timely agreement could deal a new blow to South Korea's export sector.

South Korea's Trade Minister recently warned that negotiation time is extremely tight, and the upcoming elections could further hinder progress on the agreement.

Continued Deterioration of Economic Fundamentals, GDP Unexpectedly Contracts

According to the latest data, South Korea's GDP unexpectedly contracted by 0.1% in the first quarter of 2024, marking the first negative growth since the peak of the pandemic in 2020. The Bank of Korea sharply revised the 2025 GDP growth forecast down from the previous 1.5% to 0.8%, nearly in half.

Gareth Leather, Senior Asia Economist at Capital Economics, pointed out in a report that despite the potential fiscal stimulus from the new president, the ongoing impacts of a weak real estate market and disrupted exports might limit the effectiveness of these measures, with annual GDP growth possibly reaching only 0.5%.

Market Reaction: Divergence in Stocks and Currency

After the policy decision was announced, South Korea's KOSPI index extended its gains, rising 1.7% intraday, reflecting the market's positive expectations for further easing. However, the Korean won came under pressure, falling 0.71% to 1381.40 against the US dollar, indicating that concerns over economic and political risks are still increasing.

Overall, the Bank of Korea is entering a "tug-of-war" between policy and reality: on one hand, aiming to ease growth pressure through accommodative policies, yet on the other, needing to find a balance amid a complex and changing political and external environment.

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