A day before the implementation of the reciprocal tariff in the United States, the Korea-U.S. trade negotiations reached an agreement. The market assesses that tariffs were set at a similar level to major countries such as Japan and the European Union (EU), which may alleviate some uncertainty surrounding global trading conditions. However, the possibility of a delay in the Bank of Korea's interest rate cut has increased as expectations for a Federal Reserve interest rate cut have retreated following the Federal Open Market Committee (FOMC) decision to maintain the benchmark rate.
◇ Korea's reciprocal tariff set at 15%... same as major countries like Japan and EU
On the 30th (local time), U.S. President Donald Trump stated through a post on the social media platform Truth Social that he decided to lower the reciprocal tariff on Korea from 25% to 15%. This is at the same level as the reciprocal tariff agreed upon with Japan and the European Union (EU). South Korea's major export item, semiconductors, will receive most-favored-nation treatment, and the tariff on automobiles is set at 15%.
The outcome of this negotiation significantly departs from the scenario the Bank of Korea assumed in its revised economic outlook from May. At that time, the Bank of Korea had assumed a basic tariff rate of 10% and a specific tariff rate of 25%. While the tariff on automobiles has decreased, the reciprocal tariff rate has increased. However, it seems that the impact of the increased basic tariff will be mitigated by the fact that the still undetermined semiconductor tariff will not be disadvantageous compared to major countries, but it cannot be guaranteed.
Therefore, there is interest in whether the Bank of Korea's forecast for annual gross domestic product (GDP) growth of 0.8%, presented in May, will be maintained. On the 24th, during a presentation on real GDP for the second quarter, the Bank of Korea evaluated that if the Korea-U.S. reciprocal tariff rate is set at the same 15% as Japan, it will not deviate significantly from the tariff assumptions made during the May outlook. In the previous forecast, it was anticipated that if the tariff rate were significantly reduced, the growth rate would increase by 0.1 percentage points (p), and conversely, if it remained at 25%, it would decrease by 0.1 p.
However, given that the results of tariff negotiations with major countries will also have a significant impact, it is expected that the outcomes of negotiations with other countries will be variables. Lee Chang-yong, Governor of the Bank of Korea, emphasized during a media briefing following a meeting of the Monetary Policy Committee on the 11th of last month that the tariffs imposed on China and Vietnam should also be considered, explaining that 'the indirect effects could be even larger.' For example, if high tariffs are imposed on China, where Korean corporations have their production bases, domestic processes may be disrupted, leading to a decrease in overall industrial production.
Deputy Governor Yoo Sang-dae held a 'market situation assessment meeting' at the Bank of Korea the same day and noted that 'as the Korea-U.S. trade negotiations have concluded at a tariff rate level similar to that of major countries, uncertainty related to it is expected to diminish,' adding that 'as trade negotiations among major countries such as the U.S. and China are underway, the impact of changes in global trading conditions on various sectors of the domestic economy and the financial and foreign exchange markets will be closely monitored.'
◇ U.S. Federal Reserve maintains interest rate for fifth consecutive time... expectations for a cut in September drop
The results of the regular meeting of the Federal Open Market Committee (FOMC) released that day were also of primary interest. The Federal Reserve (Fed) maintained its target range for the policy interest rate at 4.25% to 4.50% during the meeting. This marks the fifth consecutive freeze since the first FOMC held after the inauguration of the Trump administration in January. Nine members, including Chair Jerome Powell, supported the freeze, while Director Michelle Bowman and Vice Chair Christopher Waller opposed it by advocating for a 0.25% cut.
The Fed explained that it decided to maintain interest rates due to increased uncertainty regarding economic conditions. Powell stated, 'The current rate is modestly restrictive,' emphasizing that 'it does not overly constrain the U.S. economy. Now is the time to pay closer attention to the trajectories of key economic indicators.' Specifically, he expressed caution regarding the tariff policy of the Trump administration, noting that 'the short-term impact on prices may be limited, but the spillover effects could last longer than anticipated.'
This trend was also reflected in the statement. The FOMC rated U.S. economic activity as 'solid growth' last June, but revised it to 'moderately slowing during the first half' this time. Previously, it had stated that 'uncertainty had decreased but still existed,' whereas this time it mentioned 'uncertainties remain high.'
Following this meeting, market expectations for a rate cut by the Fed in September fell rapidly. According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of a rate cut in September reflected in the federal funds futures market stood at 43.2%. It dropped from 64.6% the previous day, plummeting by more than 20 percentage points in just one day. In contrast, the probability of maintaining rates increased from 35.4% to 56.8%. The probability of consecutive freezes in September and October surged from 18% to 36.2%.
Toronto-Dominion Bank (TD) noted that 'market participants had expected Chair Powell to make dovish comments, but the continued emphasis on relying on future data led to reduced expectations for a rate cut in September.' Morgan Stanley (MS) projected that 'the Fed would maintain interest rates through mid-2025 and start cutting them after early 2026 when the effects of tariffs are expected to peak.'
◇ "Increased possibility of delayed cuts in Korea... key issues include real estate and Korea-U.S. interest rate gap"
Market opinions have assessed that the conclusion of the Korea-U.S. tariff negotiations and the Fed's freezing of the benchmark interest rate have complicated the Bank of Korea's interest rate decision scheduled for the 28th of next month. While the conclusion of the tariff negotiation acts as a factor that alleviates economic uncertainty, the delay in the Fed's interest rate cut could exacerbate financial market instability. There are concerns that if the historically high Korea-U.S. interest rate gap (2.00 percentage points, based on the upper interest rate) persists, it could accelerate the outflow of foreign capital.
Kim Seong-soo, a senior researcher at Hanwha Investment & Securities, noted, 'There is a growing perception that a cut in August is unlikely,' adding that 'the outcomes of the tariff negotiations were not worse than expected, mitigating downward pressure on the economy, and the Fed is also showing a cautious stance, making it difficult for the Bank of Korea to lower rates.' Park Sang-hyun, a researcher at iM Securities, stated, 'The possibility of the Fed's rate cut being postponed to September is increasing, so we cannot rule out the possibility of the Bank of Korea's cut being delayed to October and November.'
In particular, the key issue is expected to be the stabilization of the real estate market. Since the beginning of this year, the Bank of Korea has expressed caution about rising housing prices and the expansion of household loans in some regions of Seoul, particularly in the Gangnam area (Seocho District, Gangnam District, Songpa District). According to the minutes of the Monetary Policy Committee meeting held on the 10th, one Commissioner assessed that 'the situation requires careful monitoring for a considerable period regarding the real estate market.'
The recovery of private consumption is also noteworthy. The Bank of Korea has emphasized the need for cuts based on previous weak consumption. However, the second-quarter GDP announced this month showed a higher-than-expected growth rate of 0.5% in private consumption, and government consumption also increased by 1.2%, providing some leeway for policies. After the passage of the second supplementary budget in the National Assembly, overseas investment banks have also raised their annual growth rate forecasts for Korea, increasing the possibility of 1% growth.
Baek Yoon-min, a researcher at Kyobo Securities, stated, 'Concerns about domestic growth are still significant, and while a second supplementary budget has been enacted, growth forecasts still fall short of potential growth rates.' He added, 'If monetary policy decisions focus on growth, the possibility of a cut in August remains high. However, if the rate is cut, the Korea-U.S. interest rate gap may reach new highs, which will deepen the Bank of Korea's concerns.'