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The Bank of Korea (BOK) cut its policy rate by 25bps to 2.50% at its May 29 meeting, as expected. This marks the fourth rate cut in the current cycle, following 25bps reductions in October, November 2024, and February 2025.
A weakening growth outlook continues to pressure the BOK to ease further. At this meeting, the central bank sharply lowered its 2025 GDP forecast to 0.8% from 1.5%. Growth headwinds remain, particularly on the trade front. Even if reciprocal tariffs under IEEPA are revoked by a US court ruling, automobile tariffs under Section 232 will remain in place, posing challenges to South Korea’s export outlook.
Inflation dynamics support further easing. The BOK held its 2025 inflation forecast at 1.9%, implying room for 1–2 additional rate cuts this year, likely bringing the policy rate to 2.00–2.25%. Four out of six board members were open to further cuts within the next three months, suggesting the next move could come as early as July.
The KTB yield curve has room to steepen. Short-end yields could decline further, with markets pricing in only one more rate cut this year. Long-end yields would remain under upward pressure if the Democratic Party wins the June 3 election and gains control of both the presidency and parliament, increasing expectations of fiscal expansion.
KRW faces appreciation pressure. Ongoing Korea-US trade talks and easing political uncertainty have strengthened expectations for KRW appreciation, supported foreign equity inflows, and lifted the KOSPI. However, Democratic Party frontrunner Lee Jae-myung maintains a balanced stance between the US and China and is unlikely to pursue a rapid trade deal with the US. He also faces multiple legal challenges, which could shorten his tenure even if elected — suggesting domestic political risks will persist after the election.
Ma Tieying 馬鐵英, CFA
Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
[email protected]Topic
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