Home > Business > Economy

'Into a dark tunnel': BOK signals rate cut in May, warns of negative growth

Published: 17 Apr. 2025, 17:13 Updated: 17 Apr. 2025, 19:42

PARK EUN-JEE
[email protected]

Bank of Korea Gov. Rhee Chang-yong speaks during a meeting on the direction of monetary policy at the Bank of Korea's headquarters in central Seoul on April 17. [YONHAP]

Korea’s central bank raised the possibility of the first quarter economic growth plunging below zero, flagging a further downgrade of its annual GDP forecast and a possible rate cut in May.

The assessment follows the Bank of Korea’s (BOK) decision to hold its benchmark interest rate unchanged at 2.75 percent on Thursday as it opts to maintain a wait-and-see mode amid precarious economic conditions fraught with trade rows and geopolitical uncertainty.

“Given the sluggish growth in the first quarter, this year’s annual reading is likely to come short of the previous 1.5 percent forecast, which was made in February,” BOK Gov. Rhee Chang-yong said during a press meeting after the decision.

Multiple institutions lowered their projection for Korea’s GDP with Morgan Stanley forecasting 1 percent and S&P Global 1.2 percent.

“The fact that U.S. tariff policy is more aggressive than expected at the time of the February projection will further weigh on future growth,” Rhee said.

In defending why the central bank opted not to cut rates despite the challenging environment, the central bank chief cited the won’s depreciation and heightened uncertainty as warranting a freeze.

“It is true that downside risks to growth have widened to a great degree. But given that the intensity of U.S. tariff policies and the responses from major economies are changing at a quick pace, we believe the level of uncertainty is so high that it is difficult to even establish a baseline scenario for the growth outlook at this point,” he said.

“Against this backdrop, the currency exchange rate has shown sharp short-term volatility, which we believe warrants special attention to its potential impact on financial stability,” Rhee noted.

Speaking of the current volatility linked with tariff risks, he said it is like entering “a dark tunnel” blocking views, which pace adjustments.

But he indicated that the freeze won’t last long since all six monetary policy board members called for a cut within three months in their forward guidance.

“As for the notion that a cut in May is highly likely, we can say that the possibility has increased compared to the past because now all of the six members want to leave a cut open to possibility,” he said.

Analysts see Thursday’s comments as dovish, which could pave the way for multiple cuts this year.

“We continue to expect the BOK to deliver the next rate cut in its May meeting on May 29, when the BOK will release its updated economic forecasts,” said Yoon Jee-ho, senior economist at BNP Paribas.

“We have brought forward our rate cut expectations and now anticipate that BOK will deliver 25 basis point rate cuts in the second quarter and third quarter, bringing the policy rate down to 2.25 percent by end-2025, considering significant downside risks to Korea’s growth,” the economist said.

BY PARK EUN-JEE [[email protected]]