South Korea cuts rates to 3%, marking its first back-to-back cuts since 2009.
GDP growth forecast lowered amid weak exports and global tariff uncertainties.
The rate cut reflects focus on growth over currency stability as inflation eases to 1.3%.
South Korea’s central bank unexpectedly cut its benchmark interest rate by 25 basis points to 3.00% on Thursday. This marks its second consecutive reduction and first back-to-back cut since 2009, as the country grapples with economic growth concerns and shifting global monetary dynamics.
The Bank of Korea (BOK) lowered its GDP growth forecast for 2024 to 2.2% from its previous 2.4% estimate. At the same time, it reduced the 2025 outlook to 1.9% from 2.1%. This revision follows disappointing third-quarter GDP data, which showed growth of just 1.5% year on year, short of the expected 2% expansion.
South Korea’s export growth is projected to decline for the fourth consecutive month in November, slowing to 2.8% year-on-year from October’s 4.6%. This would mark the weakest growth in 14 months. The slowdown in growth is primarily due to uncertain U.S. tariff policies affecting demand.
Despite concerns over the Korean Won’s weakness, the BOK prioritized economic growth over currency stability. The Korean won had hit a two-year low of 1,411.31 on November 14. The decision came as inflation moderated to 1.3% in October. It was also the lowest level since February 2021.
Morgan Stanley’s chief Korea and Taiwan economist, Kathleen Oh, noted the surprising nature of the cut. She stressed the BOK’s focus on deteriorating growth prospects, particularly in exports. “The U.S. government has not officially announced any measures yet, but the expectation around the tariffs on China, and of course Mexico and Canada… puts increased downward pressure on Korea’s exports front,” Oh explained.
Following the announcement, the Korean won depreciated 0.3% to 1,392.17, while the benchmark Kospi index rose 0.29%. The BOK’s decision reflects its assessment that current rates remain above the neutral rate, estimated at -0.2% to 1.3% for the first quarter of 2024. This will also provide room for monetary easing to support economic growth.
The rate cut aligns with a broader shift in global monetary policy. This is evidenced by recent Federal Reserve discussions. Fed officials, while divided on the future path of rate cuts, agreed to maintain flexibility in their approach following their November meeting. This is where they reduced rates to the 4.50%-4.75% range. Chief U.S. economist for Pantheon Macroeconomics, Samuel Tombs, also shared his expectation that the FOMC will reduce the funds rate by a further 25 bps in December.
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