The escalating tariff conflict initiated by U.S. President Donald Trump has left central bank leaders in South Korea and the United States grappling with limited policy options.
Despite the potential for negative economic growth in the first quarter, Bank of Korea (BOK) Governor Rhee Chang-yong opted to maintain the benchmark interest rate at 2.75% on April 17, citing concerns over currency volatility stemming from tariff-induced uncertainties.
Meanwhile, U.S. Federal Reserve Chair Jerome Powell warned that the tariffs could simultaneously trigger inflation and a recession in the United States, acknowledging the Fed’s limited capacity to counteract both outcomes.
The BOK’s Monetary Policy Board met on Apr. 17 and voted to keep the key interest rate steady at 2.75%. While further rate cuts are needed to boost the economy amid deepening recession fears, the bank chose to prioritize stability as the won recently approached 1,500 per dollar—levels last seen during past crises.
The BOK had already lowered the rate three times by 0.25 percentage points—in October and November last year, and again in February this year—bringing it down from 3.5% to the current 2.75%.
Speaking at a press briefing after the decision, Gov. Rhee said, “It feels like we’ve suddenly entered a dark tunnel due to changes in U.S. tariff policy,” adding, “In a situation like this, we need to slow down and wait until things brighten up.”
Recent instability in the won, triggered by U.S. trade policy, was one of the main reasons the BOK hesitated to cut rates this month.
On Apr. 17, the won closed at 1,418.9 won per dollar, recovering significantly from 1,484.1 won on Apr. 9. That spike had marked the highest level since Mar. 12, 2009, when the won hit 1,496.5 won at the height of the global financial crisis. The surge earlier this month reflected growing concerns that S. Korea could be hit hard by Trump’s reciprocal tariff measures.
Although the tariffs were later postponed by 90 days, easing pressure on the won, market conditions remain shaky. Over just eight days, the won’s exchange rate swung by 65.2.
Other factors that influenced the central bank’s decision included concerns that changes to Land Transaction Permission Areas could fuel household lending, and the need to monitor the pace of U.S. rate cuts.
The BOK also warned that S. Korea’s economy may have contracted in the first quarter. In a report released the same day assessing recent economic conditions, the bank said the growth rate for the first quarter is now estimated to fall below its February forecast of 0.2%, indicating weaker momentum than expected.
It added that a slight contraction cannot be ruled out, citing prolonged domestic political uncertainty and growing concerns over U.S. tariff policy.
What’s more concerning is that the U.S’s tariff has yet to fully take effect. The first quarter’s results do not even reflect the broader economic fallout from the trade conflict.
Meanwhile, central banks in other countries—such as India and New Zealand—have responded preemptively with rate cuts to shield their economies from the looming impact of tariffs.
India’s central bank cut its benchmark rate from 6.25% to 6%, New Zealand’s from 3.75% to 3.5%, and the Philippines’ from 5.75% to 5.5%. However the Bank of Korea, constrained by the need to defend its currency, cannot act as swiftly.
“I’m afraid the window for stimulus may have already closed,” said Joo Won, the head of Economy Research Department of Hyundai Research Institute. “With growth forecasts already in the 0% range, the deeper threat to the economy is the looming recession—not the won-dollar exchange rate or rising household debt.”
On Apr. 16, Fed Chair Powell also warned that the Trump administration’s tariff strategy could unleash both inflation and recession in the U.S., acknowledging that the central bank may be unable to prevent both outcomes.
