BOK holds key rate amid US tariff pressure, won volatility

The Bank of Korea held its base rate steady at 2.75 percent Thursday, as the South Korean economy faces headwinds from the US administration’s tariff measures.

The central bank also projected it would have to cut the country’s gross domestic product growth forecast for 2025 to below the previous estimate of 1.5 percent.

The rate freeze was supported by five out of six members of the Monetary Policy Board, excluding BOK Gov. Rhee Chang-yong, whose individual vote is not disclosed. One of the six members suggested bringing down the rate by 25 basis points.

“The uncertainties are very high, making it difficult to establish a base scenario,” Rhee said at a press conference held shortly after the rate-setting meeting.

“Though a rate cut is necessary when it comes to growth and prices, we would have to hold the rate for a while, considering the uncertainty in (tariff) policies and (possibility of) capital outflow.”

The won's value against the dollar has been fluctuating widely in reaction to the US tariff measures. The won weakened by 33.7 won per dollar on April 7, following the US' announcement of "reciprocal tariffs." On April 9, the won's value fell to 1,487.6 per dollar during daytime trading, marking its weakest level since March 2009.

The local currency strengthened to the 1,420 won range earlier this week as investors priced in hopes that the US may adopt a softer stance on tariff enforcement, and closed Thursday’s daytime trading session at 1,418.9 per dollar, the strongest level this year.

However, the volatility of the currency's value continues to weigh on the local economy.

"Korea seems to be heavily impacted by the US administration's tariff measures, as it is closely connected with China in trade and also depends on exports. The political instability has not yet been fully resolved either. It could be said that the won's depreciation is more severe than the fundamentals of the local economy," Rhee viewed.

Rhee further noted that the BOK may have to cut its previous 1.5 percent growth projection released in February. The central bank is set to release an update next month.

“Though we'll have to wait and see how the tariffs impact the global economy, it is highly likely that this year’s growth estimate will have to be brought down under 1.5 percent.”

“Tariffs aside, we may have to revise down the growth rate for the first quarter as the recent political uncertainty persisted for longer than expected,” he said.

In February, the BOK projected Korea’s GDP would grow by 0.2 percent in the first three months of this year. But the central bank's report released Thursday showed the BOK is anticipating a growth estimate of lower than 0.2 percent, and is even considering the possibility of an economic contraction during the period.

“It is difficult to pinpoint how much the figures will have to be adjusted as there is a great deal of uncertainty about how the final tariffs will be decided through country-by-country negotiations, also how and when a supplementary budget will be drawn up, and how fast economic sentiment will recover as political uncertainty eases,” Rhee said.

Market experts view the US tariff threats as encouraging the BOK to ease its monetary policy to boost the local economy.

“The April meeting shows the monetary policy board has turned dovish significantly,” Kang Seung-won, an analyst at NH Investment and Securities, said. “The board is prioritizing the economic downside risks.”

"Because a steep cut to the policy rate could stir financial uncertainty, the BOK is likely to bring down the rate one time in May, take a pause in July, and cut once again in August," said Ahn Ye-ha, analyst at Kiwoom Securities.