Article content

(Bloomberg) — The Bank of Korea is widely expected to resume its easing cycle this week in the absence of early fiscal stimulus, supporting the economy against Donald Trump’s tariff war that has already weighed on business and consumer confidence dented by political turmoil.

Article content

Article content

All 19 economists surveyed by Bloomberg expected the South Korean central bank to cut the benchmark interest rate by a quarter-percentage point to 2.75% when the board convenes Tuesday. The consensus indicates the speculation for a hold has largely subsided since Governor Rhee Chang-yong left the door open to staying pat in an interview with Bloomberg earlier this month.

Article content

In January, all six board members excluding Rhee, who didn’t disclose his view, said that they were open to a cut in the next three months. Rhee has since called for fiscal stimulus to play a role in boosting the economy while expressing wariness over the weakness in the local currency.

“A supplementary budget is also key to addressing downside growth risks,” Ashok Bhundia, an economist at the Institute of International Finance, said in a note. “If the government fails to pass a supplementary budget, then a deeper rate cutting cycle may be needed.”

Rhee has suggested an extra budget between 15 trillion won ($10.5 billion) and 20 trillion won, an amount that is less than the 35 trillion won offered by the main opposition Democratic Party that controls parliament. The government is looking into the specifics of an extra budget proposal under Acting President Choi Sang-mok.

Choi, who doubles as Finance Minister, is the second interim leader since the DP led a successful impeachment campaign against President Yoon Suk Yeol for his brief martial law declaration in early December. After Yoon, Prime Minister Han Duck-soo was also quickly suspended from power.

Article content

Article content

The political turbulence weakened the won by about 30 won against the dollar at one point, adding to weakness caused by Trump’s return to power. How the currency moves will have bearings on monetary policy, Rhee said last month after the BOK held the rate unchanged at 3%.

The pause in easing came after two cuts in late 2024 and reflected worries that a third consecutive reduction could put more downward pressure on the won. South Korea is among the countries that are most vulnerable to currency fluctuations, given its reliance on trade for energy, food and economic growth.

What Bloomberg Economics Says…

“The BOK paused in January, fearing a cut could lead to a further slide in the already-weak won. But with the currency stabilizing in recent weeks, we believe those concerns won’t be a major hurdle this time.”

— Hyosung Kwon, economist

To read the report, click here

Trump has unveiled a series of tariff initiatives since his inauguration in January, raising the risk of a global trade war. He has announced 25% levies on steel and aluminum imports that will take effect in March and reciprocal tariffs on numerous trading partners that are expected to hit in April.

Article content

Additional US tariffs amounting to 25% would hit South Korea’s automobile, pharmaceutical and semiconductor industries among others, according to Citi Research economists Jin-Wook Kim and Jiuk Choi, who expected GDP would suffer a 0.2% loss. “Indirect negative impact to South Korea’s economy could be much larger in this case,” they said in a note.

With an economy that relies heavily on exports, South Korea is expected to see a deceleration in economic growth this year as a tariff war looms and a memory-chip rally softens. Consumer confidence is also weak with private spending in the doldrums.

The BOK’s consumer sentiment index remains well below the threshold of 100 that divides optimism and pessimism after plunging in December. Business confidence also stays weak among manufacturers, unable to recover to levels seen from late 2023 to mid 2024 when an export rally fueled optimism among economic policymakers.

Gross domestic product is expected to grow between 1.6% and 1.7% this year, the BOK said in January, downgrading its earlier forecast and projecting a weaker expansion than last year. After the rate decision on Tuesday, the BOK will unveil its latest forecasts.

Article content

While cutting the rate on Tuesday, the BOK will signal that it will slow down the easing cycle until May or even later, Cho Yong-gu, a fixed-income strategist at Shinyoung Securities, said in a note. Min Joo Kang, an economist at ING Economics, said each decision for the rest of the year is expected to be a close call.

“Caution abounds,” she said in a note. “The BOK worries rate cuts could accelerate the rise in domestic household debt and property prices. As such, the BOK is likely to be extremely cautious in telegraphing more rate cuts.”

In a survey underscoring policy uncertainties, 55% of local market participants told the Korea Financial Investment Association earlier this month that they expected a cut. The remaining 45% forecast a hold.

A Bloomberg survey of economists shows the BOK may conduct three cuts to bring the rate to 2.25% by the end of the year.

A week before before the decision, Rhee reiterated the bank remained in an easing cycle while saying the board would consider a variety of factors to set the rate. 

“We are in an easing cycle and there is a consensus that we are headed toward cuts,” he said at a parliamentary hearing. “But the timing will depend on several variables.”

—With assistance from Shinjini Datta.

Article content