BOK cuts key rate to 2.5 pc as S. Korea's GDP growth forecast dims

Seoul, May 29 South Korea's central bank lowered its benchmark interest rate by a quarter percentage point on Thursday, just five days ahead of the country's presidential election, in an effort to prop up economic growth amid sluggish domestic demand and uncertainties stemming from Washington's sweeping tariff scheme.

The monetary policy committee of the Bank of Korea (BOK) slashed the key rate by 25 basis points to 2.5 percent at its rate-setting meeting in Seoul.

It marked the fourth reduction since October 2024, when the BOK began a monetary easing cycle for the first time since August 2021. Since then, the central bank has lowered the policy rate by a total of 1 percentage point through May, reports Yonhap news agency.

At its previous meeting in April, the BOK held the policy rate steady, citing the need to support the weak local currency and assess the evolving impact of new U.S. tariff measures.

"Although concerns about household debt growth and an increase in volatility of foreign exchange markets still persist, the economic growth rate is forecast to decline considerably. The board, therefore, judged that it is appropriate to cut the base rate and mitigate downward pressure on the economy," the BOK said in a statement.

Thursday's rate reduction decision was unanimous, while four out of six board members voiced the need to keep open the possibility of further rate reductions in the next three months, BOK Gov. Rhee Chang-yong told a press conference.

Thursday's decision underlined the central bank's policy focus on propping up growth, as it sharply lowered its 2025 real gross domestic product (GDP) growth forecast from 1.5 percent to 0.8 percent.

"There is a possibility that future rate cuts could be larger than initially expected, as economic growth momentum has weakened significantly more than we had anticipated," Rhee said.

The sluggish growth has been driven mainly by downturns in the construction sector, private consumption and exports, though momentum is expected to begin recovering in the second half of this year, Rhee said, while pointing to "high uncertainty" regarding global trade environments.

The BOK forecasts the economy will expand by 1.6 percent next year.

In April, U.S. President Donald Trump announced reciprocal tariffs, including a 25 percent levy on South Korean goods, though the implementation was later postponed for 90 days.

Trade negotiations are under way between South Korea and the U.S., as the two sides have agreed to work toward a "July package" deal addressing trade and related issues, aiming to reach an agreement before July 8.

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