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South Korea's Central Bank Cuts Interest Rate Again, Signals More Reductions Ahead

South Korea’s economic landscape is facing mounting pressures — from political instability to international trade disputes. In response, the Bank of Korea (BOK) announced on Thursday a 25 basis point reduction in its benchmark interest rate, bringing it down to 2.5%, the lowest level since August 2022. This is the fourth rate cut in the last six policy meetings, signaling the central bank’s growing concern over a weakening economy and the need to stimulate growth.

Background: Political Chaos and Tariff Tensions

The rate cut comes at a time when South Korea is navigating a period of exceptional political and economic strain. The country is still reeling from the impeachment and removal of former President Yoon Suk Yeol after a failed attempt to declare martial law late last year. This political crisis has led to the announcement of a snap presidential election scheduled for June 3, intensifying uncertainty across financial markets.

Compounding these issues, South Korea is under the shadow of escalating trade tensions. The Trump administration’s imposition of 25% reciprocal tariffs on key South Korean exports — though temporarily suspended for 90 days — has strained relations with Washington. With a looming July 8 deadline to resolve the tariff dispute, South Korean officials are working against the clock. However, their own trade minister admitted there may not be enough time, especially with the upcoming election potentially delaying talks further.

Economy Under Strain: Contraction and Downgraded Outlook

The BOK’s decision to ease monetary policy was driven by increasingly bleak economic data. According to advance estimates, South Korea’s GDP shrank by 0.1% year-on-year in the first quarter of 2025 — the first contraction since the fourth quarter of 2020.

In its official statement, the central bank’s Monetary Policy Board cited “a considerable decline in expected economic growth” while noting that inflation remained broadly stable. As a result, the BOK revised its 2025 GDP forecast down to just 0.8%, compared to a previous projection of 1.5% — a significant downgrade that reflects the seriousness of the economic slowdown.

Capital Economics' Senior Asia Economist Gareth Leather expects even more subdued growth. In a recent note, Leather projected GDP growth of just 0.5% for 2025, citing the combined impact of a weakened property market, disrupted export channels, and fragile consumer confidence. While he anticipates fiscal stimulus following the election, he cautions it may not be enough to reverse the broader economic downturn.

Market Reaction: Stocks Rise, Currency Falls

Financial markets responded swiftly to the rate cut announcement. The KOSPI index climbed 1.25%, signaling investor optimism about looser monetary conditions. Meanwhile, the South Korean won fell 0.71%, trading at 1,383.40 against the U.S. dollar, as lower interest rates typically reduce the appeal of the currency to foreign investors.

What’s Next: BOK’s Forward Guidance and Policy Signals

In its forward guidance, the Bank of Korea hinted at further rate cuts depending on how domestic and international economic conditions evolve. “The board will maintain its rate cut stance to mitigate downside risks to economic growth and adjust the timing and pace of any further base rate cuts while closely monitoring changes in the domestic and external policy environment,” the central bank stated.

As the country heads toward a critical election and negotiates key trade agreements, the BOK’s monetary policy will remain a central lever in shaping South Korea’s economic recovery. All eyes will now turn to the June 3 election outcome, and how the incoming administration plans to steer the country through one of its most turbulent economic chapters in recent history.

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South Korea’s latest interest rate cut underscores the difficult balancing act faced by policymakers in times of deep uncertainty. With political upheaval, stalled trade talks, and a shrinking economy, the Bank of Korea’s aggressive easing stance is aimed at cushioning the blow. But whether it will be enough to stabilize Asia’s fourth-largest economy remains to be seen.