Written by Cynthia Kim and Jihoon Lee
SEOUL (Reuters) – South Korea’s central bank surprisingly cut interest rates on Thursday and signaled more to come, as economic growth faltered and policymakers took notice of trade risks from Donald Trump’s second presidency.
The Bank of Korea cut benchmark interest rates for the second meeting in a row to 3.00%, an outcome expected by only four of 38 economists polled by Reuters. The bank’s seven-member board of directors voted by five votes in favor of the reduction.
Governor Ri Chang-yong said three board members were open to further easing in the next three months as the return of former President Trump casts a cloud over the outlook for South Korea’s export-reliant economy.
“Export competition with major countries appears to be intensifying while we also noted upcoming uncertainties about the trade environment after Trump’s election victory,” Governor Rhee said at a press conference after the decision.
Thursday’s rate cut was the first rate cut since early 2009 as policymakers sought to revive growth now that inflationary pressures appear to be under control.
Asia’s fourth-largest economy faces the risk of higher tariffs, while China, its largest trading partner, could potentially face tariffs of up to 60%.
South Korea posted a record trade surplus of $44.4 billion with the United States in 2023, larger than any of its other trading partners.
For the government of President Yoon Suk-yeol, Trump’s election also added urgency to protect key growth engines, including the domestic chip industry.
On Wednesday, the government announced plans to boost support for local chip manufacturers, to help an industry that may face unfavorable policies from the incoming Trump administration.
“Despite having a couple of defectors, the fact that they have three board members who are open to cuts in the near term means that Ri has practically signaled that more cuts are on the way, especially as he has put some focus on supporting growth,” Ahn Jae-kyun said. “. , an analyst at Shinhan Securities. He sees the Bank of Korea cutting interest rates again in the first quarter.
South Korea’s economy barely managed to avoid a technical recession in the third quarter, expanding just 0.1% after an earlier contraction, as the recovery in private consumption slowed and exports stalled.
Local media reported last week that the government is considering setting a supplementary budget early next year to confront the decline in consumer spending and the slowdown in economic growth.
Asked whether the bank was ready for more downward pressure on the won, Asia’s worst-performing currency this year, Ri said it would work with the government to stabilize the foreign exchange market as needed.
Policymakers in New Zealand, Canada and Sweden have also cut benchmark interest rates by more than 100 points in recent months.
The Bank of Korea lowered its forecasts for both growth and inflation this year.
Growth forecasts for 2024 were lowered to 2.2% from 2.4% previously. Next year, he expects the economy to expand by 1.9%, weaker than his previous forecast of 2.1%.
Consumer inflation is also expected to reach 2.3% for this year, lower than the previous forecast of 2.5%.
Policy-sensitive three-year South Korean Treasury bond futures rose as much as 0.22 points to 106.63 after the news conference, while the won weakened.
