The Bank of Korea has announced a reduction in its key interest rate by 25 basis points, bringing it down to 2.75% from 3%. This marks the third rate cut in four meetings, aligning with the expectations of economists surveyed by Reuters. The decision arrives as South Korea grapples with ongoing political uncertainty, linked to the impeachment trial of President Yoon Suk Yeol, and a sluggish economy.
South Korea's GDP growth in the fourth quarter fell short of expectations, recording its slowest expansion in six quarters at just 1.2%. Economists attribute this slowdown predominantly to weaknesses in the consumption and construction sectors. Despite inflation reaching a six-month high of 2.2% in January, it remains close to the Bank of Korea's target of 2%, suggesting that the central bank is prioritizing economic growth over the risks associated with financial imbalances.
The Bank of Korea's rate cut has lowered interest rates to their lowest level since August 2022. This move comes amid concerns over potential financial volatility, yet experts observe that the widening rate spread between the U.S. dollar and the South Korean won has not triggered significant bond capital outflows. Citi reports a "limited negative impact" from the won's weakness on South Korea's financial industry and foreign capital flows.
The ongoing political climate adds another layer of complexity to South Korea's economic landscape. Domestic media reports indicate that the country's Constitutional Court will hold the final hearing of President Yoon's impeachment trial on Tuesday. The rate cut decision is partly a response to this uncertainty, as the central bank aims to bolster economic activity during this tumultuous period.
However, some caution that the rate cut could have unintended consequences. Min Joo Kang, a senior economist at ING, warns that it might accelerate the rise in domestic household debt and property prices. Such developments could pose challenges for South Korea's financial stability in the long term.