'0.8%' Low Growth Shock Drops Base Rate to 2.5% After 31 Months [Update]

[Financial News] The Bank of Korea lowered the base rate from 2.75% to 2.50% by 0.25%p. As concerns about prolonged domestic demand slump in the construction sector and the impact of US reciprocal tariffs on export slowdown have overlapped, the economic growth forecast for this year has dropped to 0.8%, prompting measures to boost the economy.
On the 29th, the Bank of Korea's Monetary Policy Committee held a meeting to decide the direction of monetary policy and lowered the base rate by 25bp (1bp=0.01%p). As a result, the base rate fell to 2.5% for the first time in 2 years and 7 months since October 11, 2022 (2.50%).
The base rate cut on this day aligns with market expectations. According to a survey conducted by Financial News on 11 bond market experts <refer to our report on February 26, 2025>, 10 out of 11 experts predicted that the Bank of Korea would lower the base rate by 0.25%p at the May Monetary Policy Committee meeting.
This is the result of the recent calming of concerns about foreign exchange market volatility, which had halted the rate cut stance of the Monetary Policy Committee last month. As trust in dollar assets weakens and the dollar index hovers below 100, there are observations that the US will demand a revaluation of the Korean won, putting upward pressure on the won. According to Seoul Foreign Exchange Brokerage on this day, the average won-dollar exchange rate fell from 1,444.31 won last month to 1,395.22 won this month (1st~28th).
The Bank of Korea's revised economic growth forecast for this year is presented at 0.8%. This is 0.7%p lower than the February forecast (1.5%), marking the largest downward adjustment since the 1.1%p adjustment in August 2020. Considering that 6 out of 11 experts predicted an entry into the 0% range, the Bank of Korea's forecast aligns with market predictions and also matches the average growth forecast for Korea presented by 8 major overseas investment banks (IB) at the end of last month.
This is due to the impact of prolonged domestic demand slump in the construction sector and export sluggishness caused by the impact of US reciprocal tariffs. Kim Seong-su, a researcher at Hanwha Investment & Securities, who predicted the Bank of Korea's growth forecast at 0.9%, said, "Although the results of the US-Korea and US-China tariff negotiations will be more positive than the initial announcement, the tariff policy itself is a factor that suppresses growth." Yoon Yeosam, a researcher at Meritz Securities, who forecasted 0.8%, also explained, "The downward risk to the economy has expanded due to the negative growth rate in the first quarter and the contraction of exports in the second quarter due to US tariffs."
The inflation forecast for this year recorded 1.9%, the same as the previous forecast, generally aligning with market expectations. Although there were predictions that the inflation rate could be adjusted upwards as the consumer price inflation rate exceeded the forecast from January to April this year, it is interpreted that downward factors such as domestic consumption slump and international oil price decline offset the upward pressure.
Meanwhile, the focal point of the press conference of this Monetary Policy Committee is expected to be the interpretation of environmental changes by the Bank of Korea. Given the significant uncertainty of the reciprocal tariffs of the Trump administration that have emerged so far, there is an interpretation that the number of additional rate cuts may increase depending on the views of Lee Chang-yong, the Governor of the Bank of Korea. In addition, as the 0% growth rate forecast has emerged, there is interest in whether there will be direct mention of the second supplementary budget after the presidential election.

eastcold@fnnews.com Kim Dong-chan Reporter