Bank of Korea lowers interest rates to support slowing economy - Trade Treasury Payments

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Bank of Korea lowers interest rates to support slowing economy

South Korea’s central bank reduced its benchmark interest rate by 25 basis points to 2.75% on Tuesday, responding to mounting economic headwinds and subdued domestic demand.

The Bank of Korea (BOK) cited weakening consumer sentiment and external pressures, including trade uncertainty and global monetary trends, as key factors in its decision. Analysts widely expected the move, which brings the policy rate to its lowest level since mid-2022.

Economic outlook and policy adjustments

Alongside the rate cut, the BOK revised its 2025 GDP growth forecast downward to 1.5%, a notable decline from its previous projection of 1.9%. While inflation is expected to hold steady, policymakers flagged risks tied to currency volatility and geopolitical developments and the reasons for their decision.

Following the announcement, the South Korean won saw a modest decline against the US dollar while, the benchmark Kospi index also edged down as investors digested the central bank’s outlook.

The interest rate differential between South Korea and the United States remains a focal point for market participants, with the Federal Reserve’s cautious stance on rate adjustments influencing capital flows in the region.

What’s next for monetary policy?

Market analysts anticipate additional rate cuts this year as policymakers continue to deal with an uncertain macroeconomic and geopolitical environment. Some projections suggest the BOK could lower rates to 2.25% by year-end, depending on inflation trends and external conditions.

In a press conference following the announcement, BOK Governor Rhee Chang-yong stopped short of committing to a specific trajectory for future cuts but emphasised the bank’s readiness to adapt to shifting economic indicators. 

South Korea continues to contend with sluggish exports, slowing global demand, and domestic political uncertainty.