Bank of Korea cuts rates to shield economy from Trump tariffs and political turmoil

In a move aimed at shielding South Korea’s faltering economy from global trade shocks and domestic instability, the Bank of Korea (BOK) on Thursday cut its key interest rate for the fourth time since October. The central bank lowered its seven-day repurchase rate by 25 basis points to 2.5 per cent, a decision that was widely anticipated by markets and economists alike.

According to Bloomberg, all 21 economists surveyed had predicted the cut, as pressure mounted on the BOK to act amid a worsening external environment and weak domestic indicators.

Economy in reverse as political crisis deepens

South Korea’s economy slipped into contraction in the first quarter of 2025, and recent indicators show little momentum for recovery. A combination of sluggish exports, faltering domestic consumption, and subdued business investment has led policymakers to acknowledge the need for further stimulus.

The BOK also revised its annual growth forecast down sharply to 0.8 per cent, from an earlier estimate of 1.5 per cent made in February. This move reflects the twin headwinds facing Asia’s fourth-largest economy: the global trade upheaval triggered by US tariffs and the uncertainty following the ousting of former President Yoon Suk Yeol.

Yoon, removed from office in April after a failed martial law attempt led to a constitutional crisis, left behind a political vacuum just as Donald Trump’s sweeping import tariffs rattled global markets.

Trump’s April announcement of 10 per cent tariffs on all US imports—and a 60 per cent duty on Chinese goods has hit export-heavy economies like South Korea especially hard.

According to Bloomberg, the South Korean won initially held steady but later fell by 0.4 per cent against the US dollar following the rate cut announcement.

Monetary easing despite election sensitivities

The rate cut comes just five days before South Korea’s presidential election on June 3, a timing that has raised eyebrows in some quarters. However, BOK Governor Rhee Chang-yong had already signalled in April that the decision would remain focused solely on the economy, not politics.

“At that time, all six board members were open to a rate cut within three months,” Bloomberg reported, “in what appeared to be a clear signal that action was coming this month.”

The recent appreciation of the Korean won, which had climbed to a seven-month high, also provided more room for the BOK to resume easing without immediately stoking inflation, a concern that had restrained its previous moves.

Fiscal stimulus on the horizon

The election result is expected to shape the broader fiscal landscape in the months ahead. The frontrunner, Lee Jae-myung of the Democratic Party, has pledged at least 30 trillion won ($21.8 billion) in stimulus focused on households and small businesses. His conservative challenger, Kim Moon-soo, has proposed a similar-sized supplementary budget aimed at boosting public welfare.

As Bloomberg notes, “The BOK and broader markets are closely watching which candidate takes office, as their fiscal strategies will shape the central bank’s room to manoeuvre.”

The South Korean parliament has already passed a 13.8 trillion won supplementary budget, targeted at buffering vulnerable sectors and mitigating tariff-induced trade risks. However, implementation of any further measures is likely to hinge on the incoming president’s priorities.