The Bank of Korea cut its main policy rate by 25 basis points from 2.75 percent to 2.50 percent at its policy meeting held today, in line with the consensus forecast. This rate has been cut in four of the last six meetings as officials seek to ease policy from restrictive levels in place since early 2023 as part of efforts to return headline inflation to their target level of 2.0 percent.

Since the previous BoK meeting mid-April, data have shown headline inflation steady at 2.1 percent in April, with core inflation also little changed at 2.1 percent in April. Growth in both exports and industrial were solid in April, but the PMI survey for South Korea's manufacturing sector showed a third consecutive contraction in April.

In the statement accompanying today's decision, officials expressed confidence that inflation will remain stable and close to their target level, with little change to their inflation forecasts. Officials expect both headline and core inflation to average 1.9 percent for 2025. Officials, however, have revised down their forecast for GDP growth this year from 1.5 percent to 0.8 percent, citing the impact on external demand of the recent escalation in global trade tensions. They also noted that there is significant uncertainty about the outlook.

Reflecting these factors, officials decided today further policy easing was warranted today. They also advised that they maintain a rate cut stance, with the timing and pace of additional easing to be guided by incoming data.

After holding rates steady at 2.75 percent in April, the BOK is widely expected to cut rates by 25 basis points at the May meeting to cushion the economy from the trade shock.

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.