(Bloomberg) — The Bank of Korea surprised investors with a back-to-back interest rate cut in the latest policy response linked to Donald Trump’s looming return to the White House.
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The central bank ramped up the pace of its policy easing by lowering its seven-day repurchase rate by a quarter-percentage point to 3% just a month after a long-awaited pivot to rate cuts to support the economy.
The BOK cited the likely policies of the incoming US administration as a factor driving heightened uncertainties for the global economy in its post-decision statement. It also lowered its growth forecast for 2025 below 2% and trimmed its projection for this year.
“Our decision can be interpreted as an acceleration of easing to deal with downward economic risks that are growing larger than we expected,” BOK Governor Rhee Chang-yong said at a briefing following the decision. “Among the biggest changes since August is the Red Sweep in the US, which was bigger than we forecast,” he said, referring to a slew of areas won by Trump’s Republican party in the election.
The unexpected rate cut initially pushed down bond yields, nudged up stocks and weakened the currency, before some of those moves were pared as market players started to reflect on the longer-term outlook implied by the move.
Rhee said he would work with the government to reduce volatility in the currency market if needed, while adding that the bank did not target any specific levels.
During the election campaign, Trump vowed to slap higher tariffs on US trading partners, a factor that would hit South Korea’s export-reliant economy. The president-elect has also touched on a potential rollback of subsidies for foreign companies operating on American soil, such as Samsung Electronics Co. and Hyundai Motor Co., adding to the possible hit for South Korean businesses.
“You should see this as a pre-emptive response to an inevitable slump in investment and consumption should the economy chill next year with Trump targeting US trading partners from China to South Korea,” said Lee Seung-suk, a researcher at the Korea Economic Research Institute, following the move.
A rate cut was predicted by only four of 22 economists surveyed by Bloomberg. The other 18 expected the bank to maintain the rate at 3.25% and assess the impact of its October pivot when the BOK trimmed rates for the first time in more than four years.
Three-year government bond yields dropped to as low as 2.645%, stocks edged up around 0.4% and the Korean won weakened against the US dollar to briefly hit 1396.25, before paring losses.
Rhee characterized the decision as a tough one and said two out of six board members had voted against the move. Still, that may not act as a brake on further reductions as the governor pointed out that three members are open to another cut in the next three months.
The BOK cut its 2025 growth forecast to 1.9% versus a 2.1% projection in August, a move that likely contributed to what the bank described as an effort to “mitigate downside risks to the economy.”
“If you look at the inflation forecast next year, it’s 1.9% so I think the BOK can easily get down to 2.5%,” said Jeong Woo Park, Nomura Korea Economist speaking to Bloomberg TV’s Stephen Engle and David Ingles. Park correctly forecast Thursday’s rate cut.
“I think eventually it should go down to 2.25% next year,” he added, a view that points to three rate cuts in 2025.
Three-year government bond yields dropped to as low as 2.65%, stocks edged up around 0.4% and the Korean won weakened against the US dollar to briefly hit 1396.25, before paring losses.
A slowdown in the housing market, a cooling of inflationary pressure and a softening pace of export growth laid the groundwork for Thursday’s cut. Trump’s victory also gave policymakers an incentive to consider ways to shore up South Korea’s trade-reliant economy against tariffs that could spike once he takes office.
“The currently available information suggests that the global economy has been facing heightened uncertainties surrounding growth and inflation, driven by the new US administration’s policies,” the BOK said.
The BOK also noted increased volatility in the currency in its statement and said it would keep a close eye on the won. “It is important to remain cautious concerning the potential for high exchange rate volatility,” the BOK said.
Rhee said the BOK was discussing raising a currency swap arrangement with the national pension fund. He added that the central bank had sufficient means to deal with currency movements if needed.
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“The rate cut will probably add to pressure on an already depreciating won — a consideration we thought would keep the central bank on hold. The decision indicates the BOK is now prioritizing growth support over short-term currency stability.”
— Hyosung Kwon, economist
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The decision goes against the BOK’s general stance of refraining from back-to-back rate cuts unless there’s an economic crisis underway. It was the first back-to-back cut since 2009, during the global financial crisis. The move underscores a sense of urgency among board members and shows the BOK is intent on becoming more agile if and when more volatility sweeps across the world economy.
South Korea’s public is also increasingly concerned about the trajectory of the economy. Consumers’ economic outlook deteriorated at the fastest pace in more than two years in November, according to a BOK survey released earlier this week.
–With assistance from Hooyeon Kim, Youkyung Lee, Jaehyun Eom, Emily Yamamoto and Kyoji Iwai.
