BOK surprises with rate cut as growth takes priority with slashed forecast

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BOK surprises with rate cut as growth takes priority with slashed forecast

Published: 28 Nov. 2024, 17:58 Updated: 28 Nov. 2024, 18:25

SHIN HA-NEE
[email protected]

Audio report: written by reporters, read by AI

Bank of Korea (BOK) Gov. Rhee Chang-yong speaks during a press conference in central Seoul on Friday after the central bank cut its key rate to 3.25 percent. [BOK]

The Bank of Korea (BOK) surprised the market with an unexpected 25-basis-point interest rate cut on Thursday, prioritizing the mitigation of downside risks for an economy saddled with weakening export growth and sluggish demand.

This is the first time since the 2008-2009 financial crisis that the Korean central bank has lowered its key rate for two consecutive meetings.

Reflecting the weakening momentum, the BOK adjusted its growth projection for the Korean economy from the previous 2.4 percent to 2.2 percent for this year, and from 2.1 percent to 1.9 percent for 2025.

Rescue plan amid Trump jitters

The central bank’s Monetary Policy Board decided to implement a 0.25 percentage point cut in its key interest rate to 3 percent during its final rate-setting meeting of the year, marking the second reduction in a row.

Out of six board members excluding BOK Gov. Rhee Chang-yong, four supported a rate cut, while the remaining two preferred to leave the rate unchanged.

“Although the volatility of the exchange rate has increased, inflation stabilization has continued along with an ongoing slowdown in household debt, and downward pressure on economic growth has intensified,” the central bank said in a policy statement.

“The Board, therefore, judged that it is appropriate to further cut the base rate and mitigate downside risks to the economy.”

The latest decision defied market expectations, as five out of six policy board members had previously stood behind holding the rate steady for the upcoming three months in their previous forward guidance in October.

Rhee attributed the reversal to two key developments: growing policy uncertainties driven by the U.S. presidential election results, and the ongoing structural slowdown in export growth.

“We had been taking post-election uncertainties into account, but ‘a red sweep,’ where the Republican Party controls both the presidency and both houses of Congress, was slightly beyond our expectations,” admitted Rhee during a press conference following the rate-setting meeting.

While noting that the proposed shifts in policy by the incoming Trump administration have exacerbated external risks, the governor also highlighted the more fundamental issue of the waning market competitiveness of Korean exporters.

“Despite record export revenue, the growth in the sheer export volume has significantly slowed in the third quarter,” said Rhee during a press conference following the rate-setting meeting.

“We believe the slowdown has been driven by structural factors such as intensifying competition rather than short-term factors.”

Concerns have been growing over Korea’s prospective growth potential, as the semiconductor sector — which has been the country’s flagship industry — face intensifying competition from cheaper Chinese products. Rising trade barriers may also further hinder growth for the export-driven nation, especially with President-elect Trump proposing a universal tariff on all U.S. imports.

Bank of Korea Gov. Rhee Chang-yong bangs the gavel at the central bank in central Seoul on Thursday. [JOINT PRESS CORPS]

Growth takes priority over forex volatility

During the press conference, Rhee admitted that the latest decision “was more difficult than ever.”

While slowing inflation and debt growth constituted grounds for a rate cut, the volatile foreign exchange market remains a major challenge, as the depreciation of the local currency against the dollar may further accelerate foreign capital outflow and stimulate inflation.

The central bank, however, prioritized revitalizing weak domestic demand in order to mitigate the potential impact of slumping exports.

“The rate reduction was decided based on its impact on overall domestic demand, as we expect the trickle-down of export growth to demand to weaken,” said Rhee.

The slowing export growth should be addressed with “industrial policies and structural reform,” the governor suggested, adding that “the interest rate will serve as a cornerstone for general economic growth.”

If the foreign exchange volatility expands excessively, the central bank will work with the government to mitigate the depreciation with policy tools such as foreign exchange reserves, said Rhee.

A 0.5 percentage point cut in the benchmark rate, if reflected in loan rates, is estimated to reduce the total annual interest rate burden for households by 6 trillion won ($4.3 billion) a year, according to BOK data submitted to the office of Democratic Party Rep. Jin Sung-joon.

Following the rare back-to-back rate cut, the governor even hinted at an additional reduction in the upcoming three-month period.

“Three out of six board members except myself have expressed their preference for holding the key rate steady at 3 percent for the next three months, while the remaining three advocated for keeping open the possibility of further cuts below 3 percent,” said Rhee of the regular prognosticating forecast of board members.

BY SHIN HA-NEE [[email protected]]