Seoul: U.S. President Donald Trump's comprehensive tariff strategy is anticipated to exert downward pressure on South Korea's economic growth and inflation, though its impact on the local financial market would be limited, according to the Bank of Korea (BOK). The central bank shared this assessment in its latest biannual monetary policy report, following the imposition of a 25 percent tariff on steel and aluminum imports by the United States from all countries.
According to Yonhap News Agency, Washington plans to introduce "reciprocal tariffs" on April 2, imposing new levies on U.S. imports to match those imposed by other countries on American goods. This move is expected to escalate the trade war, which has already unsettled the global financial market. The BOK's report indicates that such tariff policies are likely to reduce South Korea's exports to the U.S. and other countries, amid a slowdown in global trade, and could weaken investor sentiment due to increased uncertainties in the trade environment. These factors are projected to intensify downward pressure on economic growth and inflation.
The BOK has projected a 1.5 percent annual growth for the South Korean economy in 2025 and a 1.8 percent increase for the following year. However, in a worst-case scenario of escalating trade conflict, South Korea's GDP growth could decline by 0.1 percentage point in 2025 and 0.4 percentage point in 2026 from these baseline forecasts. Deputy Governor Park Jong-woo emphasized the high level of uncertainty and the rapid pace of change, stating that it is premature to decide whether a revision of the growth forecast is necessary. The situation will be closely monitored.
The report also highlighted that while the Trump tariffs might have a "limited" impact on inflation this year, the anticipated slower growth next year could exert more substantial downward pressure on prices. The central bank had earlier predicted a 1.9 percent annual increase in consumer prices for both 2025 and 2026.
Regarding the financial market, the BOK noted that Trump's tariff policy is expected to have a "limited impact" on South Korea's stock market and long-term interest rates compared to the circumstances during his first term. However, the report cautioned about the high level of uncertainty and the need for vigilance against potential market volatility during the U.S. policy's implementation. Prolonged or intensified trade disputes could lead to a bearish stock market and further downward pressure on government bond yields amid risk-averse sentiment.
A BOK official warned that an intensification of the Sino-U.S. trade conflict could result in a stronger U.S. dollar and a weaker Chinese yuan, adversely affecting South Korean foreign exchange and financial markets. Recently, the Korean won has weakened significantly, staying well above 1,450 won per dollar amidst political turmoil following President Yoon Suk Yeol's martial law declaration on December 3 and the ongoing strengthening of the dollar.