MNI BOK WATCH: Rate Cut Expected As Economy Weakens

The Bank of Korea is expected to lower its Base Rate by 25 basis points to 2.5% this Thursday to prevent further economic deterioration, but ongoing global uncertainty and the weak won will weigh on the Board's decision, observers told MNI.

“I will not be surprised if the bank cuts the rate this week as domestic demand, such as consumption and capital investment, remain weak,” noted an expert familiar with South Korea’s economy and monetary policy. 

Unemployment increased 20bp to 2.9% in March, 10bp higher than expected. However, the won has also softened considerably over the last six months, even with recent U.S. dollar weakness, which could influence the BOK’s policy stance, as it did in January when currency concerns contributed to the Board’s decision to hold the base rate.

With inflation hovering around 2%, the bank still has room to wait and monitor conditions without acting immediately, the expert added. The bank is likely to signal openness to additional rate cuts again this week – even if it opts to hold for now – as the pace of recovery remains sluggish, he said. 

At its February meeting, the BOK cut rates by 25bp, with Governor Rhee Chang-yong highlighting increased downside risks to growth and signalling potential further easing. (See MNI BOK WATCH: Rhee Flags More Cuts, No Hint Of Timing) 

GLOBAL TRADE

March inflation rose slightly to 2.1% y/y, up 10bp from February, but remains close to the BOK’s 2% target, leaving room for further monetary easing, noted another analyst, adding the bank is also watching the impact of U.S. tariffs on South Korean trade.

Exports rose 3.1% y/y in March, marking a second consecutive monthly increase, driven largely by an 11.9% surge in semiconductor shipments. However, much of the gain stemmed from front-loaded orders placed ahead of the U.S. tariff implementation. Automobile exports rose a modest 1.2%.

Auto sector stocks in Japan and South Korea jumped Tuesday after U.S. President Donald Trump suggested a possible temporary exemption for the industry from the proposed 25% tariff.

Despite last week’s 90-day pause on new U.S. tariffs, the BOK is expected to maintain its easing stance as the broader economic effects, especially on exports, continue to weigh on growth. Policymakers are also focused on ongoing bilateral trade talks with the U.S. South Korea remains hopeful that the strength of its shipbuilding sector and demand for U.S. energy imports will help shield it from harsher U.S. tariffs. The U.S. has prioritised negotiations with South Korea and the outcome is being closely watched by other trade partners.

The BOK is also expected to review updated global growth forecasts from the IMF’s upcoming World Economic Outlook due mid-April.

Domestic political tensions have also eased somewhat following the start of former President Yoon Suk Yeol’s criminal trial and the announcement of a snap election scheduled for June.