Bank of Korea Cuts Key Rate to 2.75% to Boost Economy - Market Reaction < Video < Article

※This content was broadcast on the 'Economy ON' program of Yonhap News TV on February 18 (Wednesday) at 4 PM. (Featuring: Lee Kyu-sun, Yonhap Infomax reporter, Hosted by: Lee Min-jae)

[Anchor]

The Bank of Korea's Monetary Policy Board has lowered the base rate by 0.25 percentage points to 2.75%. Let's take a closer look at the background of this rate cut, future outlook, and the financial market's reaction.

[Reporter]

The Bank of Korea's Monetary Policy Board has cut the base rate from 3.0% to 2.75%, a 25 basis point reduction. This decision was made unanimously by all board members. The main reason for the rate cut is that while foreign exchange market instability has somewhat subsided, an urgent response to the economic situation was needed.

The dollar-won exchange rate, which once threatened to reach 1,500 won during the state of emergency, has stabilized significantly downward. Currently, the exchange rate is recording around 1,420 won. This is a much more stable level compared to when it exceeded 1,480 won immediately after the state of emergency.

On the other hand, our economy this year is facing multiple adversities, making it difficult to guarantee even 1% mid-range growth, which is significantly lower than the potential growth rate. The Bank of Korea has lowered its growth forecast for this year from 1.9% to 1.5%, a 0.4 percentage point reduction.

There are growing concerns that export momentum will weaken as the new U.S. administration under Donald Trump intensifies tariff pressure. Domestic demand is also failing to gain momentum due to domestic political instability and a slump in the construction sector, particularly in regional areas.

[Anchor]

In January, they maintained the rate, but why did they decide to cut it this time?

[Reporter]

At the January meeting, the board members stated that while the economic situation alone would warrant a rate cut, they maintained the rate considering the exchange rate issue. This decision was made in a situation where the exchange rate instability mentioned at that time has somewhat subsided.

According to a survey conducted by Yonhap Infomax on February 19 among 21 domestic and foreign financial institutions, 20 institutions (about 95%) predicted a 25bp cut, indicating that the market had sufficiently anticipated this decision.

In its monetary policy statement, the Bank of Korea explained, "While caution in the foreign exchange market remains, inflation rates are stable, household debt growth is slowing, and growth rates are expected to be significantly lower. Therefore, we judged it appropriate to further lower the base rate to alleviate downward pressure on the economy." The board members also emphasized that they will closely monitor the impact of the rate cut on inflation, growth, and financial stability.

[Anchor]

How did the economic forecast for this year, announced along with this rate cut decision, turn out?

[Reporter]

The Bank of Korea's economic growth forecast for this year is 1.5%. This is a 0.4 percentage point downward revision from the 1.9% forecast in November last year. Deputy Governor Kim Woong explained, "Growth in the mid-1% range is not a recession."

Deputy Governor Kim analyzed, "Considering the GDP gap at the potential growth rate of 2% from last year to this year and next year, last year was at a 'zero' level, and this year is expected to show a slightly negative situation."

Particularly, domestic demand is expected to account for most of the growth contribution this year. Lee Ji-ho, Director of the Research Department at the Bank of Korea, explained, "Out of the 1.5% growth forecast for this year, the contribution of net exports is virtually zero, and we expect about 1.5% growth from the domestic side."

Regarding prices, consumer price inflation for this year is forecast at 1.9%, in line with the November forecast (1.9%), and core inflation is expected to be 1.8%, slightly lower than the previous forecast (1.9%).

[Anchor]

How is the possibility of further rate cuts projected?

[Reporter]

The Bank of Korea has left open the possibility of further rate cuts. In its monetary policy statement, the Bank maintained the phrase "will decide on the timing and pace of further base rate cuts going forward."

However, the possibility of consecutive cuts seems low. Governor Lee Chang-yong explained that out of 6 board members, 4 expressed the view that maintaining the rate at 2.75% would be desirable in the next 3 months, while only 2 said the possibility of a cut should be left open within 3 months.

Governor Lee emphasized, "All members agree that we are in a rate cut cycle." He also mentioned that they have already reflected two to three rate cuts this year, including this one, in their growth forecast. This implies that they are considering an end-of-year rate level of 2.25% or 2.5%.

[Anchor]

I heard that Governor Lee Chang-yong also commented on the level of the base rate. What assessment did he make?

[Reporter]

Governor Lee Chang-yong judged that the current base rate level of 2.75% is higher than the median of the neutral rate and is at or above the upper end. He explained, "2.75% is not in the middle of the neutral rate, but at the upper end or above it," adding, "It can be described as neutral or restrictive."

[Anchor]

How is the supplementary budget (extra budget) expected to affect future economic stimulus and rate cuts?

[Reporter]

The extra budget is expected to reduce the burden of economic stimulus. Governor Lee Chang-yong said that the effect of the extra budget was not reflected in this economic forecast, stating, "If an extra budget is drawn up, it will be an upward factor for growth."

He predicted that if an extra budget of about 15-20 trillion won is drawn up, it would have the effect of raising the growth forecast by 0.2 percentage points to 1.7%. Deputy Governor Kim Woong explained that this extra budget size assumption is based on the premise of it being drawn up in the second quarter.

However, Governor Lee Chang-yong stated that while it would be desirable not to exceed 20 trillion won for the extra budget, if growth improves due to a large-scale extra budget exceeding this, monetary policy would be conducted taking this into account. Regarding the possibility of additional easing if this year's growth rate falls short of 1.5%, he emphasized the need for fiscal policy coordination, pointing to the necessity of fiscal role.

[Anchor]

How is the economic outlook for next year coming out? Please also explain the growth rate forecast for next year provided by the Bank of Korea.

[Reporter]

The Bank of Korea forecasts a growth rate of 1.8% for next year. This is 0.3 percentage points higher than this year. Governor Lee Chang-yong evaluated, "The 1.8% growth rate forecast for next year is a decent growth rate that should be accepted considering Korea's current strength."

He added, "To achieve higher growth than this, restructuring needs to be implemented," and "However, if it falls short of 1.8%, we should consider additional stimulus measures in terms of interest rates and fiscal policy."

[Anchor]

How do you view the impact of U.S. monetary policy on Korea's interest rate policy?

[Reporter]

The possibility of an early end to the Federal Reserve's (Fed) rate cuts could act as an obstacle to Korea's rapid rate cuts. The Monetary Policy Board mentioned, "The global economy and international financial markets will be influenced by the progress of U.S. tariff policy implementation, changes in major countries' monetary policies, and geopolitical risks in the future."

Regarding exchange rate volatility, Governor Lee Chang-yong judged that "it has eased considerably compared to a month ago," but also mentioned, "There are various uncertainties mixed in the current exchange rate."

[Anchor]

Could you tell us how the financial market reacted to yesterday's Monetary Policy Board decision?

[Reporter]

Both the bond market and foreign exchange market are evaluating that the Bank of Korea's decision was more dovish than expected. Market participants assessed that the Monetary Policy Board's decision was neutral or somewhat dovish. A bond dealer at a securities firm evaluated, "The market's thinking about the rate cut path and the Bank of Korea's thinking are not very different, as stated several times."

The dollar-won exchange rate closed regular trading at 1,430.40 won at 3:30 PM in the Seoul foreign exchange market on the day of the Monetary Policy Board meeting, up 3.00 won from the previous session. Although it rose slightly, the fluctuation range was only 3.70 won, showing a relatively stable appearance. Foreign exchange dealers analyzed that the Bank of Korea's decision was more dovish than expected, and concerns about the exchange rate have somewhat decreased.

kslee2@yna.co.kr

(End)

Kyu Sun Lee kslee2@yna.co.kr