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S.Korea signals rate cuts in May, year ahead as Trump tariffs pose ’significant’ risks

2025-04-17 13:52:12

By Cynthia Kim and Jihoon Lee

SEOUL (Reuters) -South Korea’s central bank on Thursday signalled it would cut rates in May and left the door wide open to further monetary easing to cope with "significant" risks to the economy from U.S. President Donald Trump’s sweeping tariff policy.

After the Bank of Korea’s seven-member board held the benchmark interest rate at 2.75% as expected at its monetary policy review earlier in the day, Governor Rhee Chang-yong emphasised the BOK’s readiness to respond to economic uncertainties.

"Leaving me aside, all six board members are open to an interest rate cut when we look at the policy path for the three months ahead," Rhee said at a press conference.

The governor’s remarks highlight a rapidly changing global environment after the BOK’s policy statement earlier warned of a possible economic contraction in the first quarter, largely due to the worst wildfires on record as well as domestic political turmoil.

Much of the focus was on the global trade shock unleashed by the Trump administration.

"The downside risks to growth have expanded significantly," Rhee told reporters, and "given that the intensity of the U.S. tariff policy and the responses of major countries are changing rapidly in the short term, we believe that the uncertainty about the future growth path is so great that it is difficult to even set a basic scenario."

The BOK meeting comes hours after U.S. Federal Reserve chief Jerome Powell disappointed investors by pushing back on hopes he would act quickly to sooth investor fears, and as the Bank of Canada on Wednesday kept its policy rates steady amid the uncertainty around U.S. tariffs.

"Given that the governor has mentioned about six board members’ view on the policy rate, the BOK is likely to cut interest rates in May," said Paik Yoon-min, an analyst at Kyobo Securities.

"Policy interest rates could reach 2.25% by the end of this year but could go even lower, if annual growth rate indeed falls below 1%."

Analysts were already wagering the benchmark interest rate will be lowered to 2.25% by the end of the third quarter this year as shifting U.S. tariff policy fuels fears of a global recession and threaten to sharply curtail exports out of Asia’s fourth-largest economy.

The BOK has cut rates three times since its rate-cutting cycle started in October.

EXTRA FISCAL STIMULUS

Finance Minister Choi Sang-mok on Tuesday warned of significant downside risks to growth from tariffs and said the government will try to delay the implementation of reciprocal tariffs in negotiations with the United States.

In broad U.S. trade action that has swept up several countries, South Korea was slapped with 25% reciprocal tariffs, which Trump has since paused for three months.

The reprieve provided some relief to the Korean won which sank to a 16-year low on April 9, a level last seen when markets and policymakers were grappling with the global financial crisis.

The won cut losses after Rhee’s press conference and was quoted down 0.16% at 1,418.1 per dollar, while treasury bond futures turned lower and stocks extended gains.

The government has plans to negotiate with Washington to lower tariffs and also draft an extra budget spending of 12 trillion won ($8.41 billion) to support the economy as it tries to navigate a political crisis and an uncertain global trade environment.

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