Written by Anant Chandak
BENGALURU (Reuters) – The Bank of Korea will cut its key interest rate by a quarter point on Thursday, a month earlier than previously expected, to support South Korea's faltering economy amid risks of political uncertainty, according to a Reuters poll of economists.
Acting President Choi Sang-mok faces the delicate task of guiding Asia's fourth-largest economy amid public anger over efforts to arrest ousted President Yoon Suk-yul and the government's cut of growth forecasts for 2025 to 1.8% from 2.2%.
Political turmoil and rising domestic household debt have sent the Korean won falling to its lowest levels in nearly 15 years, while tariff threats from US President-elect Donald Trump have raised expectations of US interest rate cuts this year.
About 80% of economists, 27 out of 34, who were surveyed from January 8 to 13, expected the BOK to cut its key interest rate by 25 basis points to 2.75% on January 16. The remaining seven expected no change.
A poll conducted in November after the surprise cut of the benchmark interest rate to 3.00% saw a majority of economists expecting the bank to cut interest rates in February.
Crystal Tan, an economist at the Bank of South Korea, said: “Against the backdrop of heightened political uncertainty and growing concerns about growth, we believe the BOK will implement a third consecutive 25 basis point cut at its next meeting. The case for action has been strengthened sooner rather than later.” Anz.
“The main obstacle to successive interest rate cuts is the recent weakness of the South Korean won and concerns about financial stability… Prolonged political instability and/or direct US tariffs on South Korean exports would call for a more flexible monetary policy.”
The median forecast showed one cut from the Bank of Korea this quarter and the same move in the second and third quarters bringing the rate to 2.25% – considered the neutral rate. A suspension will follow until at least mid-2026.
The half – 14 of 28 – who had forecasts through the end of the year expected the base rate to reach 2.25%. However, eight expected the rate to reach 2.50% and six to 2.00%, highlighting the uncertainty about the outlook ahead of Trump's inauguration on January 20.
“The still-weak recovery in domestic demand, coupled with the sharp decline in consumer sentiment partly due to domestic politics, likely means the Governing Council will continue to cut interest rates towards neutral,” said Jin Choi, Korea economist at HSBC.
“However, we note that any significant change in the US Federal Reserve's future policy path could constrain the BOK's monetary easing policy in the future.”
(Other stories from the Reuters January World Economic Survey)
