On the 25th, the Monetary Policy Committee of the Bank of Korea lowered the base interest rate by 0.25 percentage points to 2.75% per year. After consecutively lowering the rate in October and November of last year and freezing it once last month, they have once again implemented a rate cut. The committee members judged that it is appropriate to lower the base rate further to ease downward pressure on the economy, given that the inflation rate is stabilizing and household debt is decreasing, while growth rates are expected to decline significantly.
The global economic downside risks from the tariff policy of the new U.S. government and the political uncertainty due to the state of emergency in December of last year also influenced this decision. The Bank of Korea's Monetary Policy Committee noted, "The domestic economy is sluggish due to increased political uncertainty and deteriorating weather conditions, while the increase in exports has weakened. Furthermore, due to a decline in economic sentiment and the influence of the U.S. tariff policy, it is expected that the recovery of domestic demand and the increase in exports will be lower than initially anticipated." On the same day, the Bank announced a revised economic outlook, downgrading this year's annual growth rate to 1.5%, a decrease of 0.4 percentage points from the November forecast of 1.9%. The growth rate forecast for next year is maintained at 1.8%, below the potential growth rate of 2.0%.
The Bank of Korea stated that it will operate monetary policy with attention to financial stability while reviewing the growth trend of the domestic economy. The Monetary Policy Committee said, "In the future, monetary policy will be determined by closely examining changes in domestic and international economic policies and political situations, as well as the impact of the recent interest rate cuts on inflation, growth, and financial stability, including the timing and pace of any further cuts to the base rate."
Below is the full text of the resolution on the direction of monetary policy by the Bank of Korea's Monetary Policy Committee.
The Monetary Policy Committee decided to adjust the Bank of Korea's base interest rate down to 2.75% from the current level of 3.00% until the next decision on the direction of monetary policy. Although caution in the foreign exchange market remains high, it is considered appropriate to further reduce the base rate to alleviate downward pressure on the economy, given that inflation is stable and the decrease in household debt is ongoing while growth is expected to decline significantly.
The global economy is facing increased downside risks to growth as a result of the U.S. tariff policy, and uncertainty in inflation trajectories has also heightened. In the international financial market, concerns regarding the U.S. government's economic policies, which had significantly escalated, have somewhat eased, and the potential for peace between Russia and Ukraine has come to the fore, leading to a partial reversal of the strong U.S. dollar trend and a decline in the long-term interest rates of major countries. In the future, the global economy and international financial markets are expected to be affected by developments in U.S. tariff policy, changes in monetary policies of major countries, and geopolitical risks.
Looking at the domestic economic situation, consumption has been sluggish due to increased political uncertainty following the state of emergency and deteriorating weather conditions, while the rise in exports has weakened. Employment continues to decline in key sectors, reflecting a slowdown. In the future, the domestic economy is expected to recover less than initially anticipated due to the impact of declining economic sentiment and the U.S. tariff policy. Consequently, this year's growth rate is projected at 1.5%, significantly lower than the forecast of 1.9% made last November. Future growth pathways are subject to high uncertainties related to the trade policies of major countries, the direction of the U.S. Federal Reserve's monetary policy, changes in domestic political conditions, and government stimulus measures.
The consumer price inflation rate increased to 2.2% in January due to rising international oil prices and exchange rates, while core inflation (excluding food and energy) remained stable at 1.9%. The short-term expected inflation rate slightly decreased to 2.7% in February. Inflation is expected to continue to stabilize around 2%, as the exchange rate will act as an upward factor but will face downward pressures due to weak demand. Accordingly, this year's consumer price inflation is forecasted to match the November estimate of 1.9%, while core inflation is expected to slightly undercut the previous projection of 1.9% at 1.8%. Future price trajectories are expected to be influenced by movements in exchange rates and international oil prices, domestic and international economic trends, and government inflation stabilization measures.
In the financial and foreign exchange markets, the won/dollar exchange rate has experienced high volatility influenced by domestic political uncertainty, changes in expectations regarding U.S. tariff policy, and the Federal Reserve's monetary policy. Long-term government bond yields have fallen and then rebounded, primarily affected by expectations of interest rate cuts both domestically and abroad. Housing prices have decreased in most areas except for Seoul, and the growth of household loans has continued to show a slowing trend.
The Monetary Policy Committee will operate monetary policy with the aim of stabilizing the inflation rate at the target level while monitoring the growth trend over the medium term, paying attention to financial stability. The domestic economy is expected to continue showing low growth while the inflation rate remains stable. In terms of financial stability, a trend of diminishing household debt is expected to continue, but attention must be given to the potential for renewed expansion due to falling interest rates and high exchange rate volatility. Therefore, future monetary policy will be determined while closely reviewing the effects of domestic and foreign economic policies, changes in domestic political situations, and the impact of past interest rate cuts on inflation, growth, and financial stability.