The Bank of Korea is widely expected to lower its benchmark interest rate Thursday, just days ahead of a pivotal presidential election, as the central bank steps up its efforts to shield a sputtering economy from risks stemming largely from Donald Trump’s tariffs.
All 21 economists surveyed by Bloomberg see the central bank cutting borrowing costs for the second time this year by a quarter-percentage point to 2.5%. In April, Governor Rhee Chang-yong said all six board members were open to lowering the rate within three months, an early signal that action would likely take place at the May meeting. The bank is also expected to cut its growth forecasts again as Trump’s levies cast a shadow over the economic outlook.
The rate decision comes just five days before South Korea votes for a new president on June 3. Both leading candidates say they will roll out extra spending to lift the economy if elected. Frontrunner Lee Jae-myung from the Democratic Party has pledged a sweeping emergency stimulus package worth at least 30 trillion won ($28.12 billion). His conservative rival Kim Moon-soo said he would discuss a supplementary budget of around the same magnitude aimed at public welfare.
The government already approved a 13.8 trillion won extra budget earlier this month, aimed at supporting small businesses and buffering trade risks. Further outlays may give the BOK scope to slow the pace of its rate reductions, but that depends on how long it takes for economic momentum to return. Rhee said in April that the central bank will keep its decisions focused on the needs of the economy and not on politics.
The BOK’s revised economic forecast for this year is expected to show a sharp downgrade from a 1.5% projection in February. Economists polled by Bloomberg see the economy growing 0.9% in 2025, as soft consumption, sluggish exports and eroded investor confidence weaken activity.
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“Given the recent trends across various aggregated economic indicators, a downward revision of the growth figure appears inevitable,” Kong Dongrak, an economist at Daishin Securities Co., wrote in a note. “While the initial interest rate cut was limited to policy normalisation, its purpose has now expanded to include economic stimulus.”
The BOK has already cut rates three times since October to cushion the economy from Trump’s protectionist shift. A 25% tariff on South Korean goods, later lowered to 10% for a 90-day grace period, continues to weigh on business sentiment.
For the time being, uncertainty about the future path of the economy seems inevitable as tariff talks between Seoul and Washington continue. The eventual outcome of negotiations between the US and China, South Korea’s biggest export markets, is also an important factor going forward.
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What Bloomberg Economics says...
Still, the election offers hope of greater stability at home after a chaotic period in national politics following former President Yoon Suk Yeol’s martial law decree at the end of last year.
“While the risk balance for growth is still tilted to the downside with persistent uncertainties around tariffs and timing of the fiscal action, we believe the worst will have passed with the election and removal of political uncertainty domestically,” Kathleen Oh, an economist at Morgan Stanley Asia Limited, said in a note.
Back in April, when the BOK held rates, Rhee said the won was undervalued compared with economic fundamentals. The won’s rebound to a seven-month high since then suggests that the currency won’t be a factor restraining the BOK for now.
Whether the won will continue to strengthen is unclear. Federal Reserve officials have indicated that their wait-and-see approach to potential rate adjustments may continue for several more months as they seek greater clarity on tariffs and their potential impact on the US economy.
What to watch for:
- The decision is expected around 9.50am in Seoul, with a statement due around 10.30am.
- Should the bank cut rates as expected, the number of dissenters calling for a hold, if any, will serve as a gauge of whether another cut is likely in the coming months. Governor Rhee typically reveals the vote count early in a briefing that usually starts around 11.10am.
- Rhee’s summary of three-month rate expectations for policy will be closely watched for similar reasons.
- Investors will also be looking out for other hints of the policy trajectory, such as comments on domestic consumption, the local property market and household debt as well as the potential impact of Trump’s policies on the economy.
