Central Bank decreases rates in May

Central Bank reduces rates: At its meeting on 29 May, the Bank of Korea (BOK) decided to lower the base rate by 25 basis points for the second time this year to 2.50%, the lowest level since mid-2022. The move was in line with the market’s expectations.

Slower GDP growth outlook and stable inflation drive the cut: The Central Bank opted for a dovish move as moderate inflation—which has been below or close to the Central Bank’s 2.0% target since mid-2024—and a sharper-than-expected economic slowdown outweighed concerns over rising household debt and increased FX volatility. Moreover, the BOK left its forecast for 2025 inflation unchanged from February’s meeting at 1.9%, expecting higher prices for processed food and services to broadly offset downward pressure from declining global oil prices and weak demand.

Bank to ease its stance further ahead: Monetary policy forward guidance remained broadly accommodative, with board members open to a further cut in the next three months. Still, in a subsequent statement, Governor Rhee Chang-yong hinted that it is unlikely that the base rate fall under 2.00% through 2026. Accordingly, our Consensus is for 25–75 basis points of further cuts by December, with a majority of panelists expecting a quarter-point reduction in Q3 amid mounting trade headwinds and sluggish economic growth. That said, our panelists indicate the pace and magnitude of future rate cuts will depend on incoming economic data and the need to balance GDP growth forecasts with financial stability and inflation risks. The Bank will reconvene on 10 July.

Panelist insight: Commenting on the outlook, Goohoon Kwon and Irene Choi, analysts at Goldman Sachs, stated: “We continue to expect one more 25bp cut in Q3 (most likely August) to 2.25%. We maintain our terminal rate forecast at 2.25%, with risks to our view tilted modestly to one more 25bp cut. Factors affecting the pace and size of further monetary easing include elevated uncertainties with U.S. tariff policy, the size and timing of additional fiscal stimulus under a new government, housing markets and household leverage, and the Fed stance.”

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