South Korea’s central bank delivered an unexpected interest rate cut on Thursday, signalling further monetary easing.
The move comes as trade uncertainties mount, linked to Donald Trump’s upcoming return to the US presidency.
The Bank of Korea (BoK) reduced its benchmark interest rate by 25 basis points to 3.00%, a move anticipated by only a minority of economists. The bank’s seven-member board approved the cut with a five-to-two majority: economic deliberations underlying the decision have been nuanced.
Governor Rhee Chang-yong noted that three board members were receptive to additional monetary loosening in the coming quarter, citing concerns about intensifying export competition and trade environment volatility following Trump’s election victory.
This rate reduction is the first back-to-back cut since early 2009, indicating a strategic shift towards stimulating economic growth as inflationary pressures seemingly stabilise. Asia’s fourth-largest economy confronts potential challenges, including the risk of elevated tariffs and the prospect of trade tensions with China.
The government has highlighted the importance of maintaining robust economic relationships with the US a major trading partner. In September 2024, South Korea exported $10.4 billion and imported $5.44 billion from US, resulting in a positive trade balance of $4.97 billion.
Nonetheless, the South Korean government intends to support domestic industries, particularly the semiconductor sector, which could face challenging policy environments under Trump.
South Korea narrowly avoided a technical recession in the third quarter, with growth marginally expanding 0.1% following a previous contraction. Private consumption recovery has decelerated, and export performance has stagnated.
The BoK has correspondingly adjusted its economic forecasts downward. The 2024 growth projection has been reduced from 2.4% to 2.2%, with next year’s outlook at a modest 1.9%. Inflation expectations have similarly been tempered, now projected at 2.3% for the current year.
Responding to potential market volatility, Governor Rhee pledged to collaborate with the government to stabilise foreign exchange markets as necessary. Policy-sensitive three-year treasury bond futures responded positively, rising 0.22 points to 106.63, while the won experienced marginal depreciation.
Central banks in New Zealand, Canada, and Sweden have similarly implemented significant rate reductions in recent months.
