The Bank of Korea, which froze the base rate last month, is expected to resume the rate cuts. Experts anticipate that at the Monetary Policy Committee meeting on the 25th, the Bank of Korea will lower the base rate to 2.75%. However, the possibility of a rise in the won-dollar exchange rate and the impact of the tariff policy under the second term of Donald Trump's administration may slow the pace of additional rate cuts.
Many believe that the 'revised economic outlook' to be announced this time will see a downward adjustment in this year's growth rate and an upward adjustment in next year's growth rate. More than half of the experts expect this year's economic growth forecast to be adjusted down from 1.9% to below 1.6%, while next year's growth rate is expected to be adjusted from 1.8% to between 1.9% and 2.0%. The majority view is that the inflation rate will remain at 1.9% for both this year and next year, the same as the previous forecast.
◇ "Economic growth slows due to the impact of martial law and impeachment political situation"
According to a survey of 10 macroeconomic and bond experts conducted by ChosunBiz on the 22nd, all respondents expect the base rate to be lowered from the current 3.00% to 2.75% at the Bank of Korea's Monetary Policy Committee meeting on the 25th. If this forecast holds true, it would indicate that the Bank of Korea, which had paused on rate cuts last month, is set to resume them. Prior to the freeze last month, the Bank had cut the rate by 0.25 percentage points twice (in October and November of last year).
Experts cited that the expectation of a rate cut stems from the weakening of consumer sentiment due to the martial law and impeachment situation in the country, which has slowed economic growth. The Bank of Korea previously projected through its blog last month that this year's economic growth rate would be lower than the previous forecast (1.9%) at around 1.6% to 1.7%. On the 18th, Governor Lee Chang-yong noted in the National Assembly that "we are also looking at a growth rate forecast of 1.6%," increasing the likelihood of further downward adjustments.
The sluggish discussions on the supplementary budget are also increasing the need for a rate cut. While both the ruling and opposition parties agree on the necessity of a supplementary budget, they have not reached an agreement on its size and items. The Democratic Party presented a supplementary budget proposal of 35 trillion won, suggesting a support payment of 250,000 won for all citizens, but the People Power Party criticized it as "election populism." Thus, the possibility of the supplementary budget passing this month remains low.
Yoon Yeo-sam, a research fellow at MERITZ Securities, stated, "It seems likely that the Bank of Korea will implement a rate cut in February, as the forecast for Korea's growth rate is likely to be significantly adjusted down to the mid-1% range," adding, "The importance of monetary policy will remain high until the supplementary budget is specified." Moon Hong-cheol from DB Financial Investment also predicted, "Considering that the domestic economy is in a recession, a rate cut will be implemented."
On the other hand, the exchange rate volatility that had constrained last month's rate cut is decreasing. The won-dollar exchange rate surged to 1,486 won at the end of December last year due to the impeachment of Acting President Han Duck-soo but has fallen to the 1,430 won range since the 14th of this month. Recently, growing expectations for the end of the Russia-Ukraine war have raised risk appetite, thus increasing the likelihood of a further decrease in the exchange rate.
Kim Seong-soo from Hanwha Investment & Securities commented, "The additional depreciation of the won, which had rapidly weakened after the martial law, has been limited, and the exchange rate has not deviated significantly from the global trend." He added, "In relative terms, it is not a serious situation at present." He continued, "Considering that all Monetary Policy Committee members agreed with Commissioner Shin Seong-hwan's claim in the last meeting that 'factors of concern such as the exchange rate have already been reflected in the market,' it is expected that the exchange rate will not be a primary consideration this time."
◇ Additional cuts expected in May… 73% of experts forecast the final rate at 2.25%
All bond market experts predict that the rate cut will resume in May, skipping the next Monetary Policy Committee meeting in April. If the Bank of Korea continuously cuts rates, exchange rate volatility may widen again, and in April, President Trump may impose additional tariffs on Canadian and Mexican products that had previously been suspended. If the U.S. imposes tariffs, domestic import prices will rise and the strength of the dollar will intensify.
However, assessments regarding the extent of the rate cut have varied. Among 11 experts, 8 (72.7%) expect the Bank of Korea to cut rates three times this year, forecasting a final rate of 2.25%. The remaining 3 (27.3%) predict that the Bank of Korea will cut rates one time less, resulting in a final rate of 2.5%.
Experts expecting three rate cuts focused on the downside risks to the economy. Kang Seung-won, a bond strategy team leader at NH Investment & Securities, noted, "This year, the Federal Reserve is expected to make two rate cuts in June and December, which will lead to a decline in market rates." He added, "After the second quarter, concerns about domestic financial instability due to the Fed's tightening fears will dissipate, and boosting the economy will become the highest priority."
Ahn Ye-ha, a senior researcher at Kiwoom Securities, commented, "In a situation where growth is expected to remain below the potential growth rate, the risks of economic downturn remain significant." He stated, "The Bank of Korea is likely to cut rates quarterly following the reduction in February, bringing it down to 2.25%." The potential growth rate refers to the rate achievable when labor, capital, and other resources are utilized to their fullest.
Experts anticipating two rate cuts are still focused on the high exchange rate levels and the potential for financial instability. Jo Yong-gu, a research fellow at Shinyoung Securities, stated, "Considering the possibility of supplementary budget execution in the second quarter, expectations for economic improvement in the second half, and inflation rates at the target level (2%), I predict a gradual cut rather than a steep one." He emphasized that "the governor of the Bank of Korea has also directly expressed the risks associated with asset price increases and the burden of exchange rate depreciation as side effects of rate cuts."
◇ Downward adjustment of this year's growth rate… "Forecasting a reduction to 1.5%"
The Bank of Korea will also announce the 'revised economic outlook' containing projections for economic growth and inflation rates at this month's Monetary Policy Committee meeting. In November last year, the Bank of Korea had projected this year's gross domestic product (GDP) growth rate at 1.9% and next year's growth rate at 1.8%. The consumer price index (CPI) inflation rate was also anticipated to be 1.9% for both this year and next year.
Ten people participated in the survey related to the revised economic outlook. Among them, 6 expected this year's growth rate to drop to 1.6%, 3 forecasted it to be 1.5%, and 1 indicated 1.7%. For next year's growth rate, 4 predicted it to be 1.8%, while 3 expected 1.9%, 2 anticipated 2.0%, and 1 estimated 1.7%.
Baek Yun-min, a researcher at Kyobo Securities, stated, "The domestic economy faces increasing uncertainty in its growth path, and the sluggish trend in domestic demand is likely to continue, while the export momentum will also weaken." Park Sang-hyun, a researcher at iM Securities, added, "The slowdown in export due to uncertainty surrounding Trump's tariff policy and the deterioration in consumer conditions due to employment challenges are expected."
Regarding inflation, both this year and next, the number of experts presenting the same 1.9% forecast as the Bank of Korea was 5 and 6, respectively. Among the 5 who had different projections on this year's inflation, 2 expected it to be 2.0%, 2 forecasted 1.8%, and 1 suggested 2.1%. For next year's inflation, 2 out of 4 predicted 2.0%, 1 forecasted 1.8%, and 1 estimated 1.7%.
Baek noted, "Inflation remains subject to some uncertainty factors like the exchange rate, but overall, I expect it will not deviate significantly from the annual target level (2.0%) amidst limited demand pressures." Park Sung-woo, a research fellow at DB Financial Investment, stated, "Due to the sluggish domestic economy, prices are expected to decrease further," adding, "There is little risk of rising oil prices, so a low level is likely to persist."