Bank of Korea Cuts Rates to Lowest Since August 2022 Amid Growth Slowdown

The Bank of Korea (BOK) has slashed its benchmark interest rate to 2.75%, the lowest since August 2022, as the country grapples with a growth slowdown. The move comes as the BOK seeks to shore up economic growth amid weak domestic demand and uncertainties at home and abroad. The Monetary Policy Committee of the BOK cut the key rate by 25 basis points during a rate-setting meeting in Seoul on February 25, 2025.



The rate cut is the third in four meetings, following two consecutive 25-basis-point cuts in October and November 2024. The BOK's decision to lower rates is in line with expectations from economists polled by Reuters, who predicted the central bank would trim rates for the third time in four meetings. The BOK's move comes as South Korea's economy faces headwinds, including a slowdown in domestic demand and uncertainty stemming from political turmoil and the global economic climate.

The BOK's decision to cut rates is also a response to the country's slowing economic growth. South Korea's GDP growth is expected to moderate from 2.2% in 2024 to 1.9% in 2025, with the recovery of domestic demand remaining moderate and growth in exports, which had been strong over the past quarters, gradually slowing down. The BOK attributed the slowdown to weakness in consumption and construction sectors, as reported in the Korea Economic Outlook (November 2024).

The BOK's rate cut is expected to have both short-term and long-term impacts on the Korean economy. In the short term, the rate cut is likely to lower short-term interest rates, making borrowing cheaper for businesses and consumers. This could stimulate economic activity and consumption. However, the BOK's decision to cut rates also raises concerns about the potential acceleration of household debt and housing price increases, as lower interest rates can encourage households to borrow more and invest in the housing market.



In the long term, the BOK's rate cut may encourage investment and stimulate economic growth by lowering the cost of borrowing for businesses. However, the BOK's decision to cut rates also raises concerns about the potential impact on financial stability, as lower interest rates can lead to increased borrowing and lending, potentially exacerbating existing imbalances in the financial system.

The BOK's rate cut is also likely to influence the Korean won's exchange rate and foreign capital flows. Lower interest rates can make investing in Korea less attractive compared to other countries with higher interest rates, potentially leading to a decrease in foreign capital inflows. Additionally, lower interest rates can lead to a depreciation of the won, as the increased supply of won makes it less valuable.



In conclusion, the BOK's decision to cut rates to the lowest since August 2022 is a response to the country's slowing economic growth and a reflection of the central bank's policy focus on economic growth. While the rate cut is expected to have both short-term and long-term impacts on the Korean economy, it also raises concerns about the potential acceleration of household debt and housing price increases, as well as the potential impact on financial stability and the Korean won's exchange rate. As the BOK continues to monitor the economic situation, it will need to balance the trade-offs between supporting economic growth and maintaining financial stability.