Bank of Korea cuts policy rate to 2.50%, signals cautious outlook

The Bank of Korea (BoK) unanimously cut its policy rate by 25 basis points to 2.50%, resuming its easing cycle amid downward revisions to GDP forecasts for 2025 (0.8%) and 2026 (1.6%) due to weaker-than-expected Q1 2025 GDP and anticipated impact from higher US tariffs. While Governor Rhee hinted at potential for larger cuts, ING interprets the BoK's stance as cautious, maintaining its forecast of a 2.0% terminal rate by year-end, contingent on the new government's fiscal and construction policies and US tariff developments, as well as concerns about asset market bubbles and the Korean won.

Analysis

The Bank of Korea (BoK) has resumed its monetary easing cycle with a unanimous decision to reduce the policy rate by 25 basis points to 2.50%, amidst significant downward revisions to its GDP growth forecasts for 2025, now at 0.8% from 1.5%, and for 2026, to 1.6% from 1.8%. These revisions are attributed to a weaker-than-expected 0.2% quarter-over-quarter contraction in Q1 2025 GDP, anticipated impacts from higher US tariffs on exports, and a drag from construction investment. While Governor Rhee acknowledged the potential for larger interest rate reductions and four of six BoK members are open to another cut within three months, his commentary also stressed a cautious stance, citing risks of asset market bubbles and uncertainties surrounding the Korean won. ING anticipates a further 50 basis points in cuts in the second half of the year, projecting a terminal rate of 2.0% by year-end. Despite inflation tracking higher than expected, the BoK maintained its 2025 inflation forecast at 1.9% and lowered its 2026 forecast to 1.8%, expecting slower growth to temper demand-driven price pressures alongside stable global oil prices and fewer anticipated corporate price hikes. The BoK underscored the conditional nature of its forecasts, heavily dependent on trade negotiations, US tariff policies, and the fiscal and construction policies of the incoming government, particularly as the current construction downturn, a correction of prior overinvestment, requires careful policy management that further rate cuts could complicate.

Key Decisions for Investors

• Investors should anticipate further monetary easing from the Bank of Korea, potentially leading to a 2.0% policy rate by year-end, which could influence valuations of KRW-denominated assets and place downward pressure on the won.
• Closely monitor upcoming South Korean fiscal and construction policy announcements from the new government, as these will be critical determinants for the BoK's future monetary path and the overall economic outlook.
• Exercise caution regarding Korean equities and growth-sensitive assets due to significantly lowered GDP forecasts, ongoing construction sector weakness, and external headwinds from US tariff policies.
• Pay attention to Bank of Korea communications for shifts in tone, as current signals mix dovish actions with cautious rhetoric, reflecting considerable uncertainty around inflation and financial stability risks.