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BOK cuts interest rate to 2.5% as economic growth slows

Published: 29 May. 2025, 10:05

Bank of Korea Gov. Rhee Chang-yong strikes the gavel during a Monetary Policy Board meeting at the central bank’s headquarters in central Seoul on May 29. [YONHAP]

The Bank of Korea (BOK) lowered its benchmark interest rate by 0.25 percentage points to 2.5 percent on Thursday, signaling a shift toward monetary easing amid growing concerns over stagnating growth.

The BOK’s monetary policy board held its meeting at the bank’s headquarters in central Seoul and decided to cut the base rate from 2.75 percent.

The decision came as the central bank sharply revised its 2025 economic growth forecast to 0.8 percent, down from the previous estimate of 1.5 percent.

This marks the first time in recent years that the BOK has projected sub-1 percent growth for the Korean economy.

The board had held the rate steady last month as the won weakened against the dollar, nearing 1,500 won per dollar.

But following a slight stabilization in the foreign exchange market after U.S.-China trade talks, the board saw room to ease policy.

A worsening outlook for exports amid rising U.S. tariffs further justified the rate cut, as policymakers feared that growth could fall into the zero percent range for the year.

Korea’s GDP contracted by 0.2 percent in the first quarter compared to the previous quarter, driven by sluggish consumption, increasing the urgency to act.

In its revised outlook released the same day, the BOK cited both external and domestic factors for the downgrade, including U.S. tariff shocks and continued weakness in domestic demand.

The new 0.8 percent projection is down 1.1 percentage points from its November estimate of 1.9 percent. The BOK had already trimmed the outlook by 0.4 percentage points in February, citing domestic political instability and tariff impacts.

Bank of Korea Gov. Rhee Chang-yong, center, strikes the gavel during a Monetary Policy Board meeting at the central bank’s headquarters in central Seoul on May 29. [YONHAP]

Korea’s annual growth has dipped below 1 percent only three times since democratization: during the 1998 Asian financial crisis, when the economy shrank by 4.9 percent, the 2009 global financial crisis, when growth came in at 0.8 percent and the Covid-19 pandemic in 2020, when GDP contracted by 0.7 percent.

The market widely anticipated a rate cut following the downgrade.

Earlier this month, the Korea Development Institute also halved its 2025 growth projection to 0.8 percent from 1.6 percent. With both institutions now forecasting sub-1 percent growth, fears of prolonged low growth are likely to intensify.

"The focus of economic policy this year has shifted from monetary to fiscal policy," said Cho Young-moo, a research fellow at LG Economic Research Institute. "The scale of the supplementary budget the new administration plans to pursue is important, but timing and content matter more. Rather than trying to boost the growth rate itself, fiscal policy should aim to ease structural low-growth concerns by stimulating consumption and investment."

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
BY KIM KYUNG-HEE [[email protected]]