In its first Monetary Policy Committee meeting of the year, the Bank of Korea froze the base rate, but this time it resumed cuts by lowering the rate to 2.75% annually. The main background is the increasing downward pressure on the economy and the adjustment of the growth rate forecast to 1.5%. The decision also took into account the stabilization of the sudden increase in the won-dollar exchange rate, as the tariff policy of the Trump administration became more concrete.
The market expects that the Bank of Korea will freeze the interest rate at the upcoming April Monetary Policy Committee meeting. This is due to the ongoing political instability and the fact that the tariff policy of the Trump administration has not yet materialized externally. However, since Bank of Korea Governor Lee Chang-yong indicated the possibility of an additional rate cut, there are forecasts that further cuts could occur in May or July.
◇ Base rate cut by 0.25 percentage points… "Economic risks increase"
The Bank of Korea's Monetary Policy Committee lowered the base rate to 2.75% annually during its regular meeting on the 25th. The decision to cut rates was unanimous. Since January 2023, the Bank of Korea had maintained the interest rate at 3.5% until September last year, focusing on price stability. After that, it lowered the rate to 3.25% in October and to 3.0% in November, shifting its monetary policy stance. In last month's meeting, it froze the rate and paused, but now it has resumed the cut.
Market sentiment suggests that this rate cut was anticipated. According to a survey conducted by the Korea Financial Investment Association from the 12th to the 17th, 55% of 100 bond market professionals expected the Bank of Korea to cut the base rate in February. Only 45% foresaw a freeze. In a recent survey by ChosunBiz, all 11 securities experts predicted a cut.
The main background to this is concerns about economic slowdown. In its revised economic outlook released that day, the Bank of Korea projected the country's gross domestic product (GDP) growth rate for this year at 1.5%, which is 0.4 percentage points lower than the forecast made in November last year (1.9%). The won-dollar exchange rate, which had soared to the 1480 won level late last year, has fallen to the 1430 won range, contributing to some stabilization in the financial market and supporting the decision to cut rates.
Governor Lee Chang-yong of the Bank of Korea noted in a press conference right after the Monetary Policy Committee that, "Although there is still caution in the foreign exchange market, the stability of the inflation rate and the trend of household debt decline suggest that the economy is expected to weaken significantly," adding, "I judged it appropriate to further reduce the base rate to alleviate downward pressure on the economy."
The governor also left open the possibility of additional cuts. He stated, "There aren't many views that suggest we should stop rate cuts at this time," and added, "Currently, the market thinks there's a likelihood of rate cuts 2-3 times this year, including in February, which is not significantly different from what we assume." If the base rate is cut by 0.25 percentage points each time, it means that the year-end base rate could be around 2.25-2.5%.
However, the timing of further cuts appears likely to be pushed back to the second or third quarter. In a survey regarding the interest rate outlook conducted among six Monetary Policy Committee members, only two indicated that the possibility of a rate cut should be considered within three months. The other four members expected the base rate to be maintained at 2.75% annually. In last month's Monetary Policy Committee meeting, all members had left open the possibility of a rate cut.
◇ Bank of Korea signals 'continuation of the rate cut cycle'... Final rate forecast at 2.25%
Market evaluations suggest the Bank of Korea's recent decision is 'dovish' (preferring monetary easing). Analysts interpret that by adjusting its annual economic growth rate forecast downward, the Bank has reaffirmed that additional rate cuts are inevitable.
Baek Yoon-min, a researcher at Kyobo Securities, said, "The fact that the Bank of Korea projected the growth rate for this year at 1.5% is also in consideration of two to three rate cuts within the year, including this decision," adding, "In a situation where prices are stabilizing and growth risks are increasing, the Bank has no choice but to focus more on monetary policy."
Jo Yong-gu, a researcher at Shinyoung Securities, stated, "The Bank of Korea has mentioned that it sees the net export contribution (the extent to which net exports contribute to economic growth) related to this year's growth outlook at 0%, which indicates a rate cut to revive the economy. However, it seems they want to moderate the pace of cuts, though they do not appear to want to send signals to halt them."
Experts projected that the Bank of Korea is likely to freeze rates during the April Monetary Policy Committee. This expectation comes from the belief that domestic political uncertainty and uncertainties regarding the Trump administration's policies will only be resolved after May. They unanimously agreed that two additional cuts of 0.25 percentage points each would occur within the year, resulting in a final base rate of 2.25%. Opinions diverged, however, on whether the timing of further cuts would be in May or July.
Kang Seung-won, a researcher at NH Investment & Securities, noted, "The U.S. Federal Reserve, which froze its base rate last month, is expected to signal adjustments to monetary policy around May as uncertainties regarding the Trump administration's policies decrease," adding, "If expectations for rate cuts by the Fed increase, the Bank of Korea is also likely to proceed with a rate cut in May."
Researcher Jo Yong-gu stated, "The forward guidance indicating the interest rate outlook for the next three months showed a preference for 'freeze' by a margin of 4 to 2 (four for a freeze, two for a cut)," adding that regarding the question of whether additional rate cuts would occur in the first half, Governor Lee's remark of 'We will see the situation' implies a greater likelihood of skipping a quarter and making a cut in July for pace management.
Meanwhile, as expectations for a rate cut grew, the government bond yields fell uniformly. On this day in the Seoul bond market, the three-year government bond yield recorded 2.596%, down 1.4 basis points (1 basis point = 0.01 percentage points) from the previous trading day. The yields on five-year and ten-year bonds closed at 2.717% and 2.825%, down 1.9 basis points and 2.8 basis points, respectively. The weekly tradable closing price of the won-dollar exchange rate (as of 3:30 p.m.) ended at 1430.4 won, up 3.0 won from the previous day.