Central bank slashes 2025 growth outlook to 1.5%, pricing in Trump’s tariff threats

Bank of Korea Gov. Rhee Chang-yong speaks at a press conference held at the central bank's headquarters in Seoul, following a rate-setting meeting on Tuesday. (Joint Press Corps - Newsis)
Bank of Korea Gov. Rhee Chang-yong speaks at a press conference held at the central bank's headquarters in Seoul, following a rate-setting meeting on Tuesday. (Joint Press Corps - Newsis)

The Bank of Korea delivered a 0.25 percentage point rate cut Tuesday to spur the economy, while slashing its gross domestic product growth forecast for this year to 1.5 percent, citing increasing trade risks.

The BOK’s monetary policy board cut the policy rate to 2.75 percent, putting the base rate in the 2 percent range for the first time in over two years.

“Though the tension in the forex market remains, the growth of prices and household debts have remained stable. The board unanimously agreed a rate cut is needed to boost the economy," BOK Gov. Rhee Chang-yong said at a press conference held at the central bank's headquarters in Seoul following the rate-setting decision.

The BOK was able to cut the rate as the volatility in the foreign exchange market has been eased to a certain level. In the previous rate-setting meeting in January, the central bank kept the rate steady at 3 percent, citing the won’s sharp depreciation against the dollar.

“The forex volatility has significantly eased compared to a month before,” Rhee said.

On Tuesday, the Korean won-dollar exchange rate closed daytime trading at 1,430.4 won. The local won gained value by around 50 won when compared to how it had weakened to 1,486.7 won on Dec. 27.

With the US Federal Reserve's target rates between 4.25 and 4.5 percent, the BOK's latest rate reduction widens the rate differential by as much as 1.75 percentage points. The gap will likely remain for a while, as the Fed is expected to hold the rate at its upcoming meeting in March, as per the CME FedWatch Tool.

The widened rate gap is associated with concerns about won depreciation, which could bring the import prices up for Korea, a country heavily dependent on energy imports. Yet the BOK maintained the outlook that consumer prices will rise by 1.9 percent this year.

"The weakened Korean won is bad for prices. But the prices can handle (the depreciation) as they have remained stable recently," Rhee said.

While consumer prices rose by 2.2 percent in January on-year, the figure had remained in the 1 percent range in the previous four months, showing an ease in inflation.

Along with the 0.25 percentage point rate cut, the central bank slashed the GDP growth rate for this year by 0.4 percentage point to 1.5 percent. The 1.5 percent outlook is even lower than the 1.6-1.7 percent mid-forecast given by the BOK in January.

“While domestic circumstances including the martial law incident were major factors (in making the forecast) in January, this time, the uncertainties, including the US tariff policies following the inauguration of President Donald Trump, have escalated,” Rhee explained.

"The US tariffs on steel and aluminum have been factored in," Rhee said, referring to Trump's recent order to impose a 25 percent tariff on all steel and aluminum imports.

"The figure also prices in the hypothesis that tariffs on major nations will largely impact (the Korean economy) from mid-2025," Rhee said.

For next year’s GDP growth rate, the BOK maintained the projection of 1.8 percent. But in a pessimistic scenario, in which trade conflicts intensify, the growth could decline to 1.4 percent for both 2025 and 2026, the central bank predicted.

"A 1.8 percent growth rate is a decent figure. The entire global economy is in difficulty," Rhee said. "Being used to the rapid growth of the past, we call a 1.8 percent growth rate a crisis. But the figure is a reflection of Korea's capacity, having relied on its existing sectors without a major restructuring."


silverstar@heraldcorp.com