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Bank of Korea slashes GDP forecast, key rate on Trump tariffs

Published: 25 Feb. 2025, 17:59 Updated: 25 Feb. 2025, 18:45

SHIN HA-NEE
[email protected]

Bank of Korea (BOK) Gov. Rhee Chang-yong speaks during a press conference following the Monetary Policy Board meeting at the central bank's headquarters in Jung District, central Seoul, on Feb. 25. [JOINT PRESS CORPS]

The Bank of Korea (BOK) sharply lowered its economic growth forecast, citing trade uncertainty driven by U.S. President Donald Trump’s tariff threats and the continued contraction of economic sentiment, while implementing a 25-basis-point rate cut to revive the waning momentum.

The central bank chopped its GDP growth projection for 2025 to 1.5 percent from the previous 1.9 percent in its outlook report released Tuesday. It expects growth to hold steady at 1.8 percent through 2026.

Earlier the same day, the bank had lowered its key interest rate 25 basis points to 2.75 percent during its first rate-setting meeting since the inauguration of the second Trump administration.

BOK Gov. Rhee Chang-yong signaled one or two additional rate cuts in the remainder of the year to boost weakening growth momentum, despite expectations that the U.S. Federal Reserve will hold its rate steady for an extended period of time.

Up to two more cuts expected

“Although concerns about foreign exchange markets still remain, inflation stabilization has continued, along with an ongoing slowdown in household debt, while the growth rate is forecast to decline significantly,” the central bank said in its policy statement. “The board, therefore, judged that it is appropriate to further cut the base rate and mitigate downward pressure on the economy.”

The latest cut followed the central bank’s decision to keep the rate unchanged in January due to the won’s depreciation against the dollar. The BOK had previously implemented two consecutive 25-basis-point cuts in October and November.

During a news conference following the rate-setting meeting, the top central banker highlighted the sharp deterioration in domestic and global economic conditions.

“Above all, the additional rate cut was due to the significant deceleration in the economic growth expected this year,” said Rhee.

“Economic slowdown is likely to persist for a while considering that the recent decline in consumer sentiment, which has been weak since the end of last year, has materialized into an actual deterioration in economic indices, and that the U.S. administration’s tariff policies are negatively affecting exports.”

The 25-basis-point reduction was a unanimous decision by all seven policy board members, according to Rhee.

Four out of six Monetary Policy Board members — excluding Rhee — supported keeping the rate unchanged in the coming three months due to heightened U.S. policy volatility, while the remaining two members supported an additional cut during the period.

Rhee expects two to three additional cuts to be delivered, in total, this year.

“I am aware of various opinions in the market,” said Rhee, in response to a question on this year’s rate-cut outlook.

“It appears that the majority is anticipating two to three additional cuts this year, including the February reduction, […] and I would say that such projection is largely in line with the BOK’s forecast,” the governor noted.

Bank of Korea Gov. Rhee Chang-yong at the Monetary Policy Board meeting on Feb. 25 at the central bank in Jung District, central Seoul. [JOINT PRESS CORPS]

Trump tariff cut growth 0.1 percentage points

The BOK's adjusted projection of 1.5 percent is even lower than the 1.6 to 1.7 percent range its rare January report suggested.

The central bank expected that the stubbornly weak domestic demand would begin to gradually recover starting in the second quarter of this year, mainly driven by the resolution of the political uncertainty involving President Yoon Suk Yeol’s impeachment proceedings and the government’s plan to front-load 75 percent of its budget in the first half of the year.

However, the trade environment is likely to grow even more unfavorable throughout the year, weighed by faster-than-expected tariff implementations by the United States.

In its updated growth outlook, the central bank that estimated private consumption would expand 1.4 percent this year, down from its initial projection of 2 percent, and that goods exports would grow by 0.9 percent, compared to the previous 1.5 percent.

The report estimates that Trump’s tariff policy, in particular, will bring down Korea’s growth 0.1 percentage point in a base scenario, which the February outlook adjustment reflects. In the worst case scenario, growth may sink an additional 0.1 percentage point, to 1.4 percent, this year, and an additional 0.4 percentage points next year.

The bank kept its inflation projection unchanged at 1.9 percent despite the weak won and an increase in global oil prices during the beginning of the year as demand pressure remains weak.

‘Supplementary budgets will be key’

Rhee reinstated his support for a supplementary budget on Tuesday, urging the passage of an additional 15 trillion won ($10.5 billion) to 20 trillion won budget plan.

“The biggest uncertainty now is the potential impact of the fiscal policy,” Rhee said, regarding 2025's growth trajectory.

“We could not factor in the fiscal policy’s impact for the latest economic outlook revision, as the supplementary budget is yet to be announced, but if the additional budget is passed [by the National Assembly] and executed in the future, it will an upside factor for growth.”

The governor once again called for structural reform to revive the country’s waning industrial competitiveness in response to a question regarding next year’s 1.8 percent growth expectation.

“There is a widespread perception that 1.8 percent growth would be a crisis because we’ve grown too accustomed to rapid growth in the past,” said Rhee.

“But I think we should accept 1.8 percent growth as what we are capable of now,” the governor suggested, citing delayed implementation of necessary economic reforms and heavy reliance on the country’s traditional forte, such as manufacturing, for its declining growth potential.

BY SHIN HA-NEE [[email protected]]