The Bank of Korea lowered its main policy rate by 25 basis points from 3.00 percent to 2.75 percent at its policy meeting held today, in line with the consensus forecast. This is the third rate cut in the last four meetings. Policy rates have been at restrictive levels since early 2023 as part of efforts to return headline inflation to their target level of 2.0 percent.

Since the previous BoK meeting last month, data have shown an increase in headline inflation from 1.9 percent in December to 2.2 percent in January, with core inflation also edging higher. Export growth, however, has weakened, while domestic political instability has also weighed on consumer and business sentiment.

In the statement accompanying today's decision, officials expressed confidence that inflation will remain stable, retaining their forecast for annual headline inflation to be 1.9 percent this year and for annual core inflation ot be 1.8 percent. Officials, however, are now less confident about the growth outlook, partly reflecting their concerns about US trade policy. They have revised down their forecast for annual GDP growth this year from 1.9 percent to 1.5 percent.

At their last meeting, officials left rates on hold partly because they were concerned about exchange rate volatility following December's short-lived period of martial law. Although these concerns remain, officials concluded that the weaker growth outlook warranted another rate cut in order to"mitigate downward pressure on the economy". They also signalled that additional policy loosening will be considered in upcoming meetings.

After surprising markets by holding rates steady at 3.00 percent in January, forecasters look for the BOK to cut by 25 basis points at the policy meeting this week.

South Korea’s central bank, the Bank of Korea (BoK), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the base rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) at 2 percent over the medium-term.

The Bank of Korea determines interest rate policy at eight meetings during the year. A post-meeting statement is issued after each meeting. The Bank also publishes its Monetary Policy report four times a year and updates economic forecasts twice a year.

Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The Bank has an inflation target at 2 percent over the medium-term. The inflation control target is set by the Bank of Korea in consultation with the government and is reviewed every two years.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.