South Korea’s central bank is expected to lower interest rates this month for the third straight time since it began rate cuts in October last year.
Analysts predict the Bank of Korea (BOK) will lower the benchmark seven-day repurchase rate by a quarter percentage point to 2.75% at the Monetary Policy Board’s first policy-setting meeting of the year on Jan. 16. More than half of surveyed experts predict two more rate cuts this year, bringing the rate to 2.25% by the end of 2025.
A survey conducted by ChosunBiz on Jan. 13 revealed that among 12 analysts at Korean securities firms, eight respondents (75%) expect the BOK to lower the interest rate from 3.00% to 2.75% at the upcoming monetary policy meeting. The remaining four (25%) expect the rate to remain unchanged.
If the BOK lowers the interest rate as most analysts forecasted, it would mark the BOK’s third consecutive rate cut since the central bank initiated a 25-basis-point reduction in October last year, followed by another cut in November.
Experts predicting another rate cut cited sluggish consumption, made worse by rising political uncertainty after President Yoon Suk-yeol’s martial law declaration and subsequent impeachment, as one of the major reasons the central bank was likely to opt for lowering rates. Credit card spending in the second week of December fell 3.1% year-on-year, according to Statistics Korea. The Composite Consumer Sentiment Index (CCSI), a measure of consumer confidence in the economy, dropped 12.3 points from the previous month to 88.7 in December, reflecting growing consumer pessimism.
Another factor backing rate cut forecasts is the slowdown in export growth, a key driver of the Korean economy. Data from the Korea Development Institute (KDI) shows that daily exports in December increased 27.9% on average for information and communications technology (ICT) products but declined by 3.6% for other items due to weakening global demand. The KDI noted that “downside risks to the economy have grown significantly” as export momentum slows and economic sentiment weakens.
“Political risks threaten Korea’s economic growth potential, which currently is projected to reach the mid-1% range for this year,” said Yoon Yeo-sam, an analyst at Meritz Securities. “Domestic demand is contracting, and the need for monetary easing has grown significantly, especially given the uncertainty surrounding potential fiscal policy responses, such as supplementary budgets.”
Those forecasting a rate freeze focused on the U.S. Federal Reserve recently signaling a slower pace of rate cuts. President-elect Donald Trump’s proposed plans for universal tariffs could drive up import and consumer prices in the U.S., potentially fueling inflation and slowing the Fed’s pace of rate cuts. This would complicate BOK’s rate cut plans, given concerns over widening interest rate differentials between Korea and the U.S.
Another concern is the Korean won’s rapid depreciation against the dollar. The won-dollar exchange rate closed at 1,460.5 won on Jan. 9, staying above the 1,450 won mark for 13 consecutive trading days since Dec. 19.
A sharp rise in the exchange rate could undermine financial stability as it is likely to negatively impact key indicators, including the Bank for International Settlements (BIS) capital adequacy ratio and the foreign currency liquidity coverage ratio (LCR).
“Taking into account political uncertainties at home and abroad after Trump’s inauguration, even if the BOK lowers rates, the impact may be limited,” said Lim Jae-gyun, an analyst at KB Securities. “And given exchange rate volatility, the BOK may prioritize financial stability over stimulating economic growth.”
All surveyed experts foresee additional rate cuts after January. They argue that an economic slowdown and a potential rise in global protectionism will compel the BOK to opt for more rate cuts. The continued rate-cutting trends by major central banks, including the European Central Bank (ECB), also support the BOK’s monetary easing stance.
