The Monetary Policy Committee: "Growth rate expected to decline significantly... Lowering interest rates is appropriate to ease downward pressure"

The Monetary Policy Committee of the Bank of Korea announced on the 25th that it lowered the base interest rate from 3.00% per annum to 2.75%, stating that "since the growth rate is expected to decline significantly, it was deemed appropriate to further lower the base interest rate to alleviate downward pressure on the economy."

Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee plenary meeting held at the Bank of Korea headquarters in Jung-gu, Seoul, on the morning of the 25th. 2025.02.25 Photo by Joint Press Corps

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In the resolution of the monetary policy direction meeting held that morning, the Bank of Korea's Monetary Policy Committee said, "Going forward, the domestic economy is expected to see weaker-than-anticipated recovery in domestic demand and export growth due to factors such as weakened economic sentiment and the impact of U.S. tariff policies." It added, "There is high uncertainty regarding the future growth path related to major countries' trade policies, the direction of the U.S. Federal Reserve's (Fed) monetary policy, changes in the domestic political situation, and government stimulus measures."

Regarding inflation, it stated, "Although the exchange rate will act as an upward factor, inflation is expected to maintain a stable trend around 2% due to low demand pressures." It also noted, "Future inflation paths will be influenced by exchange rate and international oil price movements, domestic and international economic trends, and government inflation stabilization measures."

On financial and foreign exchange markets, it explained, "The won-dollar exchange rate continued to show high volatility before declining, and long-term government bond yields fell and then rebounded mainly influenced by expectations of domestic and foreign interest rate cuts. Housing prices declined in most regions except Seoul, and the growth rate of household loans continued to slow."

The Monetary Policy Committee stated, "The domestic economy is expected to continue a low growth trend for the time being while inflation remains stable. Future monetary policy will be determined by reviewing changes in domestic and foreign economic policies, the domestic political situation, and the effects of past interest rates on inflation, growth, and financial stability, including the timing of further base rate cuts."

The Monetary Policy Committee decided to operate monetary policy by lowering the Bank of Korea's base interest rate from the current 3.00% level to 2.75% until the next monetary policy direction decision. Although caution remains in the foreign exchange market, given the continued stability in inflation and the slowing trend in household debt amid expectations of a significant decline in the growth rate, it was judged appropriate to further lower the base interest rate to ease downward pressure on the economy.

The global economy faces increased downside risks to growth due to factors such as U.S. tariff policies, and uncertainty regarding the inflation path has also risen. In international financial markets, concerns over the new U.S. administration's economic policies, which had greatly expanded, have somewhat eased, and the possibility of a ceasefire between Russia and Ukraine has emerged, leading to a partial reversal of the U.S. dollar's strength and a decline in long-term government bond yields of major countries. Going forward, the global economy and international financial markets are expected to be influenced by the progress of U.S. tariff policies, changes in major countries' monetary policies, and geopolitical risks.

Regarding the domestic economic situation, consumption has been sluggish due to expanded political uncertainty following the emergency martial law situation and worsening weather conditions, while export growth has weakened. Employment continued to slow, with decreases in the number of employed persons in major industries. Going forward, the domestic economy is expected to see weaker-than-anticipated recovery in domestic demand and export growth due to factors such as weakened economic sentiment and the impact of U.S. tariff policies. Accordingly, the growth rate for this year is projected at 1.5%, significantly below the November forecast of 1.9%. There is high uncertainty regarding the future growth path related to major countries' trade policies, the direction of the U.S. Federal Reserve's monetary policy, changes in the domestic political situation, and government stimulus measures.

The consumer price inflation rate rose to 2.2% in January due to increases in international oil prices and exchange rates, but the core inflation rate (excluding food and energy) remained stable at 1.9%. The short-term expected inflation rate slightly declined to 2.7% in February. Inflation is expected to maintain a stable trend around 2% as the exchange rate acts as an upward factor but low demand pressures persist. Accordingly, the consumer price inflation rate for this year is projected at 1.9%, consistent with the November forecast, while the core inflation rate is expected to slightly underperform the previous forecast at 1.8%. Future inflation paths will be influenced by exchange rate and international oil price movements, domestic and international economic trends, and government inflation stabilization measures.

In financial and foreign exchange markets, the won-dollar exchange rate showed high volatility influenced by domestic political uncertainty, U.S. tariff policies, and changes in expectations regarding the Fed's monetary policy, before declining. Long-term government bond yields fell and then rebounded mainly influenced by expectations of domestic and foreign interest rate cuts. Housing prices declined in most regions except Seoul, and the growth rate of household loans continued to slow.

The Monetary Policy Committee will continue to monitor growth while operating monetary policy to ensure that inflation stabilizes at the target level over the medium term, paying attention to financial stability. The domestic economy is expected to continue a low growth trend for the time being while inflation remains stable. From a financial stability perspective, the slowing trend in household debt is expected to continue, but attention is needed regarding the possibility of re-expansion due to the interest rate decline trend and the high volatility of the exchange rate. Therefore, future monetary policy will carefully review changes in domestic and foreign economic policies and the domestic political situation, as well as the effects of past interest rate cuts on inflation, growth, and financial stability, to determine the timing and pace of further base rate cuts.

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