The Bank of Korea unexpectedly lowered interest rates by 25 basis points to 3.0%, surprising the market with a back-to-back rate cut. The central bank’s decision reflects growing concerns over an economic slowdown, particularly in the tech sector, even as inflation remains stable at around 1%.
The BOK’s Monetary Policy Board lowered the benchmark seven-day repurchase rate by a quarter percentage point to 3.0% on Nov. 28, delivering its first back-to-back cut since 2009. The central bank had previously held interest rates steady for 19 months after raising rates from 0.5% to 3.5% between August 2021 and January 2023. It ended its longest rate freeze in October, cutting the rate to 3.25% and now to 3.0%.
The rate cut surprised the market. Most analysts had predicted a rate freeze ahead of the meeting. According to the Korea Financial Investment Association, 83% of 100 asset managers and analysts expected the BOK to hold rates steady at the November meeting, especially given concerns about the won-dollar exchange rate, which surged above 1,400 won per dollar.
However, signs of a weakening economy have outweighed exchange rate concerns. Korea’s gross domestic product (GDP) grew just 0.1% in the third quarter compared to the previous quarter, far below the market forecast of 0.5%.
With third-quarter growth slowing more than expected, achieving the BOK’s growth forecast for this year, 2.4%, seems increasingly unlikely. Prospects for next year are even bleaker. The International Monetary Fund (IMF) projects that Korea’s growth rate will slow to 2.0% in 2025, lower than the estimated 2.2% for this year.
“Although the exchange rate volatility has increased, inflation has continued to stabilize, along with an ongoing slowdown in household debt, while downward pressure on economic growth has intensified,” the BOK said in a statement. “The Board, therefore, judged that an additional rate cut is appropriate to mitigate the downside risks to the economy.”
Korea’s export-driven economy is also bracing for external risks, including tougher U.S. trade policies.
U.S. President-elect Donald Trump recently announced plans to impose new tariffs on imports from Mexico, Canada, and China, which could indirectly impact Korean exports. The Korea Institute for International Economic Policy estimated that if these tariffs are implemented, Korea’s exports could decrease by $5.3 billion to $44.8 billion.
“The BOK will focus on boosting growth going forward,” said Lee Jung-hoon, an analyst at Eugene Investment & Securities. “The central bank places significant importance on the 2% potential growth rate when setting interest rates, but at this rate, there is no guarantee that the economy will grow even 2% next year.”
“The BOK has acted before global headwinds take a further toll on an economy that is already losing growth momentum,” said Kang Min-joo, senior economist at ING.
