A pedestrian walks past signage for the Bank of Korea in Seoul, South Korea, on Monday, Nov. 22, 2021.
SeongJoon Cho | Bloomberg | Getty Images
South Korea on Thursday cut its benchmark interest rate by 25 basis points in a surprise move, as the country strives to boost its economy amid growth concerns.
This was the first time the Bank of Korea enacted two back-to-back cuts since 2009. It had cut rates by 25 basis points in its last meeting in October. Economists polled by Reuters had estimated the bank to hold rates at 3.25%.
The rate cut follows a weaker-than-expected GDP reading in the third quarter. GDP expanded by 1.5% year on year, below the 2% expected by economists polled by Reuters.
The BOK on Thursday lowered its GDP outlook to 2.2% for 2024, down from 2.4% forecast in August. The full-year growth outlook for 2025 was cut to 1.9% from 2.1%.
Speaking to CNBC’s “Squawk Box Asia” after the decision, Kathleen Oh, Morgan Stanley’s chief Korea and Taiwan economist, said the cut was indeed a “surprise.”
It shows the weight the BOK was giving to the deteriorating growth outlook, especially amid slowing exports, she added.
South Korea’s export growth is expected to slow for a fourth straight month in November to a 2.8% year on year, down from the 4.6% rise the month before, according to a Reuters poll.
This would be the weakest growth in 14 months, mainly due to slowing demand in the United States amid tariff policy uncertainty.
In its statement, the BOK said while inflation had stabilized, the downward pressure on the economy had intensified.
“The Board, therefore, judged that it is appropriate to further cut the Base Rate and mitigate downside risks to the economy,” the central bank said.
Inflation in the country has substantially slowed, with the October reading of 1.3% marking the lowest rate of inflation since February 2021.
Before the decision, several economists had forecast the BOK would pause rate cuts due to the weakness in the South Korean won, which has been depreciating over the past couple of months and hit a two-year low of 1,411.31 on Nov. 14.
Following BOK’s October meeting, Governor Rhee Chang-yong reportedly said the rapid depreciation of the currency against the U.S. dollar would be a critical factor in determining the pace of rate cuts in the months to come.
“The Korean won is losing against the U.S. dollar at a pace far faster and a level far lower than we would like,” Rhee said, according to the Korea Times.
The currency was last down 0.3% at 1,392.17, while the stocks benchmark Kospi was up 0.29%.
“The U.S. government has not officially announced any any measures yet, but the expectation around the tariffs on China and, of course Mexico and Canada … also puts increased downward pressure on Korea’s exports front,” Oh said.
“We think the BOK, knowing that the current rate is above the neutral rate, they were able to move ahead before the policies are confirmed from the U.S. side.”
South Korea pegs its neutral rate at -0.2%-1.3% for the first quarter of 2024, its most recent estimate, according to a Nov. 5 report by the Bank of Korea.
