The Bank of Korea (BOK) is expected to cut its base interest rate by 25 basis points to 2.75% on January 16, earlier than previously forecast, to support South Korea’s struggling economy amid political instability and a downgraded growth outlook.
A Reuters poll found that 80% of economists anticipate the rate cut, while the remaining expect no change.
Key factors influencing this decision:
- Political Turmoil: Acting President Choi Sang-mok must navigate economic challenges, including public anger over efforts to arrest impeached President Yoon Suk Yeol.
- Economic Concerns: The government recently lowered its 2025 growth forecast from 2.2% to 1.8%.
- Currency Weakness: The Korean won has hit its lowest level in nearly 15 years, exacerbated by high household debt and trade tensions, including tariff threats from U.S. President-elect Donald Trump.
This would mark the BOK’s third consecutive rate cut amid concerns about weak domestic demand and declining consumer sentiment. Economists foresee additional rate cuts later in the year, with the base rate potentially reaching 2.25% by the third quarter of 2025, considered the neutral rate.
However, constraints include:
- The weak Korean won and financial stability risks.
- Potential changes in U.S. Federal Reserve policy, which may limit the BOK’s ability to continue easing.
Economists predict the base rate will stabilize after the anticipated cuts, remaining on hold until at least mid-2026, but uncertainty remains due to political and global economic factors.
