MNI BOK WATCH: Board To Cut Rate 25bp To Support Economy
MNI (TOKYO) - The Bank of Korea monetary policy board is expected to lower its policy rate 25 basis points to 2.75% on Thursday to support the country's fragile economy, observers told MNI.
“Domestic demand, particularly consumption, is weak," said an expert familiar with South Korea's economy and monetary policy, noting the Bank will choose to support the economy over concerns around the weaker won.
Conditions do not exist for inflation to rise – despite the consumer price index increasing to 1.9% y/y in December from 1.5% in November – which will prompt the board to ease, he added.
The board lowered the policy rate late last for the second consecutive time, with Governor Rhee Chang-yong pointing to further easing ahead. (See MNI BOK WATCH: Rate Lowered To 3%, More Cuts Eyed)
The Bank will likely lower the policy rate once per quarter until it reaches 2.5%, noted a separate expert. Automobile sales are weak on the back of high borrowing rates, while exports have also suffered, he said.
ECONOMIC PAIN
South Korea’s gross domestic product rose 0.1% q/q in Q3, recovering from Q2's 0.2% contraction, but lower than the Bank's 0.5% August forecast.
The Korea Development Institute, the nation's leading think tank and an active participant shaping the country's economic development, lowered its 2025 GDP forecast to 1.8% from 2.1%. Weak production could delay the economic recovery, while lower sentiment could risk further downside economic pain, the institute warned.
The first expert noted the Bank must sacrifice the won's strength to prevent the economy from worsening further, pointing to weaker exports that fell 0.2% over the third quarter driven by slowing global demand.
While November saw a 1.4% export rebound, the 14th straight rise with semiconductors increasing 30.8%, automobile sales to China and the U.S. both declined.
The U.S. Federal Reserve is expected to keep the federal funds rate unchanged this month on the back of the solid labour market.
The first expert added that the policy rate could fall to 2.25% and the market will watch the Bank's updated outlook for economic growth and inflation to gauge the policy rate's future trajectory.