South Korea implemented a radical rate reduction, reducing the key rate to 3% in order to stimulate economic growth.
The Bank of Korea’s unexpected action underscores the urgency of its efforts to revitalize the nation’s economy, given the ambiguity surrounding the impending Donald Trump administration and the slowdown in exports.
The rate decline is the first policy pivot since August 2021 and the first reduction since May 2020, following a comparable reduction in October. Analysts had anticipated that the South Korean government’s radical rate cut would maintain rates at their current level, as the Korean won has recently fallen to approximately 1,400 won per dollar and there has been ongoing concern regarding the high levels of household debt. Nevertheless, the central bank prioritized economic recovery over debt challenges and foreign exchange volatility.
South Korea’s daring rate cut its projection for 2025 growth to 1.9% from 2.1% and its estimate for this year to 2.2% from 2.4%. Both figures are below the nation’s potential growth rate and fall short of the 2.2% forecast by the IMF for the upcoming year.
The economy’s primary source of growth has experienced a significant decline in exports. The smallest increase over a year occurred in October, when exports increased by 4.6% year-on-year to $57.5 billion. A prospective U.S. protectionism under Trump’s leadership is causing analysts to issue a warning regarding additional export deceleration.
The consumer price increase of 1.3% in October was the lowest in 45 months. The BOK reduced its inflation outlook for 2024 from 2.5% to 2.3% and reduced the estimate for the following year to 1.9%.
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