On December 9, 2024, people strolled past the Korea Exchange (KRX) building in Seoul, South Korea. This day marked a significant economic decision from the Bank of Korea. They cut interest rates by 25 basis points, bringing them down to 2.75%, the lowest since August 2022. This move aims to boost an economy facing slow growth.
The central bank’s adjustment comes after economists predicted the cut, based on a survey by Reuters. This marks the third rate cut in four meetings as the Bank of Korea seeks to ease economic pressures and forecasts a notable decline in growth.
The bank revised its growth outlook for 2025, lowering it from 1.9% to 1.5%. They expect domestic demand and export growth to be weaker than previously anticipated, influenced by negative economic sentiment and new tariff policies from the U.S.
While the Bank of Korea acknowledged ongoing concerns about foreign exchange stability, it noted that inflation has stabilized. They held steady with a 1.9% inflation forecast for 2025, but reduced the core inflation outlook slightly from 1.9% to 1.8%.
This economic backdrop coincides with political uncertainty in South Korea related to President Yoon Suk Yeol’s impeachment trial. The Constitutional Court is set to conduct the final hearing, adding another layer of complexity to the nation’s economic climate.
After the rate announcement, the Kospi stock index saw a 0.46% drop, and the South Korean won weakened to 1,431.3 against the U.S. dollar.
Alex Holmes from the Economist Intelligence Unit shared insights on CNBC. He believes the Bank of Korea may continue to reduce rates rapidly. Initially, the bank was cautious due to concerns over financial stability and rising household debt. However, the political turmoil has shifted focus to support the economy and address inflation concerns.
Recent data revealed that South Korea’s GDP growth in the fourth quarter came in at just 1.2%, the slowest increase in six quarters. The Bank of Korea linked this slowdown to weak consumption and a struggling construction sector.
Despite worries about changes in the currency’s value, Citi’s analysis suggests that the broadening gap between the U.S. dollar and the South Korean won hasn’t led to significant capital outflows from bonds, indicating some resilience in foreign investment.
Min Joo Kang, an economist at ING, commented on the recent political situation, noting that the extreme weakness of the won has eased. She expects inflation to remain within the Bank of Korea’s target range of 2%, allowing for more flexibility in interest rate decisions. January saw inflation rise to a six-month high of 2.2%, which is still close to the target.
However, Kang also cautioned that lowering rates might lead to increased household debt and rising property prices, posing new challenges for South Korea’s economy.
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