Bank of Korea surprises with rate cuts amid worsening economic outlook

In South Korea, the Bank of Korea made a surprising decision to lower its benchmark lending rates, marking the first two consecutive cuts since 2009. This decision, which surprised many economists who expected rates to remain unchanged, was influenced by a deteriorating growth outlook. The BOK reduced its GDP forecast for 2024 to 2.2%, down from the previous estimate of 2.4%. Further, the economic forecast for 2025 was revised to 1.9% from 2.1%. The cuts were partially motivated by a significant decline in export growth, which is anticipated to slow down for the fourth consecutive month, attributed to decreased demand, particularly from the United States. In October, the South Korean economy recorded a low inflation rate of 1.3%, the lowest since February 2021, indicating a potential easing of the economic pressure. The BOK's statement included observations that while inflation had stabilized, the downward pressures on the economy were growing. This assessment led the Bank to decide that further cuts to the base rate were necessary to mitigate risks to the economy. Notably, economists had predicted the bank would hold rates steady due to ongoing depreciation of the South Korean won, which had reached a two-year low against the US dollar before the rate cut. Kathleen Oh, a notable economist from Morgan Stanley, described the rate cut as a surprise and emphasized that this reflects the severity with which the BOK views the current economic challenges. The depreciation of the won and its impact on inflation and economic growth were critical topics highlighted in discussions surrounding this decision, particularly as the rapid decline of the currency against the dollar was already concerning. The BOK's approach appears to be proactive, intending to stabilize the economy ahead of potential shifts in US monetary policy. As South Korea's economy navigates these turbulent waters, continuous monitoring of export trends, inflation rates, and currency exchange values will be essential. The BOK's decision points to a concerted effort to foster economic stability amid global uncertainties and internal economic challenges. The future direction of South Korean monetary policy will likely hinge on ongoing economic indicators and global financial trends as the BOK aims to support growth during this critical period.