Seoul: South Korea's central bank maintained its benchmark interest rate at 2.75 percent on Thursday in an effort to stabilize the nation's currency and ensure financial stability, amidst the uncertainties stemming from the Donald Trump administration's extensive tariff measures. The decision by the Bank of Korea (BOK) was anticipated following the last quarter-percentage-point rate cut in February, which was part of a series of reductions since October 2024, marking the first monetary easing cycle since August 2021.
According to Yonhap News Agency, BOK Governor Rhee Chang-yong described the situation as akin to entering a "dark tunnel" with regard to Trump's tariff policy, indicating the bank's cautious approach. While one board member dissented, the committee collectively acknowledged the potential need for further rate cuts in the coming months due to sluggish economic growth.
The BOK's decision highlights its focus on supporting the local currency amid market volatility triggered by the unpredictable U.S. tariff policies. Earlier this month, the Korean won plummeted to its lowest level in approximately 16 years following the U.S.'s announcement of "reciprocal" tariffs, including a 25 percent tariff on South Korea and a 10 percent baseline tariff on foreign imports.
In a significant policy shift, U.S. President Trump announced a 90-day pause on the reciprocal tariffs, leading to a strengthening of the Korean won to a yearly high of around 1,420 won in recent sessions. With the interest rate gap between South Korea and the U.S. standing at up to 1.75 percentage points, further widening could lead to additional depreciation of the Korean currency, experts warn.
Federal Reserve Chair Jerome Powell has also adopted a cautious stance, committing to close market monitoring before any interest rate adjustments. The BOK's decision to hold the rate steady appears to be aimed at preserving policy space as South Korea prepares for tariff negotiations with Washington.
The Korean won was quoted at 1,410 won on Thursday afternoon, marking the lowest level for the year, despite a slight increase from the previous session. BOK Governor Rhee warned of a likely downgrade in this year's economic growth forecast, citing the impact of U.S. tariffs and domestic political instability following former President Yoon Suk Yeol's imposition of martial law in December.
"This year's GDP growth outlook will inevitably fall below our earlier forecast of 1.5 percent presented in February," Rhee stated, noting the influence of sectoral tariffs and levies on China instituted by Trump's policy. The BOK plans to announce an adjusted growth outlook in May.
Attention is also focused on the South Korean government's proposed supplementary budget. Finance Minister Choi Sang-mok has suggested increasing the budget from 10 trillion won to 12 trillion won to bolster key industry sectors, potentially raising the growth rate by 0.1 percentage points this year.
In its statement, the BOK emphasized the appropriateness of maintaining the current base rate level and the importance of assessing changes in domestic and external conditions due to U.S. tariff policies and government stimulus measures. The central bank also highlighted the need to monitor exchange rate volatility and household loan trends amidst weak economic activities and worsening global trade conditions.