Bank of Korea cuts rates as growth outlook darkens.

Seoul, South Korea - The central bank delivered a quarter-point interest rate cut on Thursday, dramatically lowering its economic growth forecast and signaling deepening concerns about the country's economic trajectory amid global trade tensions and domestic weakness.

The Bank of Korea reduced its benchmark rate to 2.50% from 2.75% in a unanimous decision by the Monetary Policy Board.

The move accompanied a sharp downgrade of the 2025 growth forecast to just 0.8%, down from the 1.5% projection made three months earlier.

The severe revision reflects mounting pressures across multiple sectors of the economy.

Construction investment has collapsed more severely than officials anticipated, while private consumption remains sluggish and export growth has decelerated.

The construction sector's troubles alone knocked 0.4 percentage points off the growth projection despite representing only 14% of the gross domestic product.

Higher United States tariff rates have compounded the economic challenges.

The central bank noted that tariffs of at least 10% now apply to all U.S. trading partners, exceeding the 5% to 10% rates that officials had assumed in their February forecasts.

These increased trade barriers reduced the growth projection by an additional 0.2 percentage points.

The economic weakness has emerged across broad segments of the economy.

Private consumption showed a slight improvement in the first quarter, with officials expecting a slower recovery than previously anticipated.

This consumption weakness contributed a 0.15 percentage point reduction to the growth outlook.

Export performance has become increasingly uneven.

While semiconductor sales have maintained a solid performance, traditional manufacturing sectors, including petrochemicals and steel, have struggled with declining global competitiveness and deteriorating trade conditions.

Despite the economic headwinds, inflation has remained stable near the central bank's target.

Both headline and core consumer price inflation registered 2.1% in April.

The bank maintained its full-year inflation forecast at 1.9%, with core inflation expected to reach 1.9%, slightly above earlier projections.

Short-term inflation expectations have declined, falling to 2.6% in May from 2.8% the previous month.

Officials expect price pressures from processed food products and services to be offset by declining global oil prices and weak demand conditions.
The central bank acknowledged significant risks to its monetary policy stance.

Household debt growth has accelerated due to increased housing transactions in February and March, while foreign exchange markets have experienced heightened volatility.

Housing prices in Seoul have continued to rise, even as they decline in other regions across the country.

Financial market conditions have reflected the complex economic environment.

The Korean won has weakened against the U.S. dollar amid eased trade tensions and expectations of bilateral currency discussions between the United States and Asian countries.

Long-term government bond yields have risen in response to higher U.S. rates, though the increase has been more limited than in other major economies.

The policy decision represents a shift toward more accommodative monetary conditions as officials prioritize supporting economic growth.

The central bank indicated that future rate cuts could be larger than previously anticipated, given the deteriorating economic outlook.

However, officials will closely monitor economic data before determining the timing and pace of any additional moves.

Global economic conditions continue to present challenges for South Korea's export-dependent economy.

The United States is expected to face significant deceleration in growth as tariff policies take effect.

At the same time, the Bank of Korea predicted that the Eurozone and China would only see modest growth despite fiscal stimulus measures.

Additionally, the Bank of Korea announced that it would lower the interest rate on its loan support facility from 1.25% to 1.00% to provide further support to small and medium-sized enterprises facing economic challenges.

This interest rate cut is one of the most significant adjustments in recent years.

It is interpreted as a signal that the Korean economy is under threat amid the ongoing deterioration of the global trade environment.