Bank of Korea (BoK) Governor Rhee Chang-yong defended the central bank‘s decision to lower interest rates in a press conference following Tuesday’s policy meeting. The BoK reduced the policy rate by 25 basis points (bps) to 2.75%, resuming its interest rate-cutting cycle after holding rates steady at 3% in January. This move comes as the central bank revises its economic growth forecast downward, now projecting a 1.5% expansion for the year, down from an earlier estimate of 1.9%. However, it maintained the inflation forecast at 1.9% for both this year and next.
Key highlights from the BoK’s post-policy meeting include:
Unanimous Decision: The decision to cut rates was supported by all members of the central bank board.
Rate Cuts for Special Loan Programs: The BoK also lowered interest rates for its special loan programs to provide additional economic support.
Board Opinions on Future Policy: Four board members suggested that the current policy rate could be maintained for the next three months, while two members indicated the possibility of further rate cuts in the same period.
Market Expectations Align: The market consensus anticipates two additional rate cuts this year, which is in line with the BoK’s outlook.
Volatility in USD/KRW Eases: The volatility in the USD/KRW exchange rate has somewhat decreased following the rate cut announcement.
Economic Growth Challenges: The BoK highlighted the need for fiscal support to achieve growth above 1.5% this year. The central bank also noted deteriorating consumer sentiment and a struggling construction sector as significant challenges.
In the immediate aftermath of the rate cut, the USD/KRW exchange rate experienced a sharp sell-off, briefly testing the 1,428 support level before recovering to 1,429.93. At the time of writing, the currency pair was up by 0.08% on the day.
Despite the rate cut, the BoK remains cautious about the broader economic landscape, emphasizing the need for coordinated fiscal policy to drive stronger growth and improve sentiment.
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