South Korea’s central bank cuts borrowing costs to nurse the sluggish economy

People wearing face masks walk by the headquarters of the Bank of Korea in Seoul, South Korea, Thursday, May 28, 2020. (AP Photo/Ahn Young-joon)

SEOUL, South Korea — South Korea’s central bank cut its key interest rate and sharply lowered its growth outlook for the country’s economy in 2025, as it moved Thursday to counter U.S. President Donald Trump’s tariff hikes and weak domestic demand worsened by recent political turmoil.

Following a monetary policy meeting, the Bank of Korea cut its benchmark interest rate by a quarter percentage point to 2.5 per cent. It was its fourth cut since October, when it began lowering borrowing costs for the first time in years to support a weakening economy. The bank slashed its 2025 growth outlook to 0.8 per cent, nearly halving its previous projection of 1.5 per cent announced in February.

Share prices jumped, with the Kospi gaining 1.7 per cent.

Although trade tensions have recently eased, the global economy is still expected to slow due to the lingering effects of increased tariffs. U.S.-China friction over trade and geopolitical uncertainties will continue to weigh on markets, the bank said in a statement.

South Korea’s domestic economic activity remained sluggish in April following a contraction in the first quarter driven by weak consumption and business investment, the bank said. It said job creation in manufacturing and other sectors was slow.

Bank of Korea Governor Rhee Chang Yong said there could be additional rate cuts in coming months, citing the worsened outlook for the economy. But he also cautioned against lowering borrowing costs too quickly, given the country’s high household debt and real estate prices.

“If rates are lowered too quickly, there’s a high risk that liquidity will flow into asset prices like housing rather than boosting the real economy,” he said in a news conference. “Any base rate adjustment must take into account its impact on the real estate prices and household debt in the Seoul region,” he said, referring to the country’s capital area where house prices are highest.

Since beginning his second term, Trump has vowed to slap huge new tariffs on foreign products entering the United States, including those from Mexico, Canada and China, which he insists will create more domestic jobs and shrink the federal deficit.

In recent weeks, South Korea has sent trade officials to Washington to discuss the Trump administration’s trade measures, including reciprocal tariffs and potential product-specific duties on semiconductors and cars, which are major exports for the country’s trade-dependent economy.

A decision by a U.S. federal court saying Trump lacks the legal authority to impose such tariffs could upset his plans, but the White House has appealed and it’s unclear what will happen in the longer run.

Experts say South Korea’s leverage in trade talks and its ability to tackle domestic economic challenges have been undermined by political instability after former President Yoon Suk Yeol’s ill-fated imposition of martial law in December. Yoon was formally ousted from office in April, setting the stage for a snap presidential election next week.

Kim Tong-hyung, The Associated Press