South Korea Slashes Interest Rates Amid Economic Slowdown

South Korea’s central bank has cut its benchmark interest rate from 2.75% to 2.5% to support a faltering economy. Alongside the cut, the Bank of Korea sharply lowered its 2025 growth forecast to just 0.8%, down from 1.5%—the weakest projection in five years.

South Korea cuts rates as exports drop, growth forecast slashed.

Tariffs and Political Instability Fuel Downturn

The economic slowdown is being driven by U.S. trade tariffs and domestic political uncertainty. A 25% tariff introduced in April—later reduced but still affecting key industries like autos and steel—has weakened export performance. Internally, recent political disruptions have further dampened investor confidence.

Central Bank Flags Severe Risk

The central bank warned that the current downturn could be more severe than the 2008 financial crisis, noting a significantly higher risk of negative growth. This marks the first time since the pandemic that projected growth has dipped below 1%.

Uncertainty Dominates Outlook

With inflation trends unclear and global trade conditions in flux, the path to recovery remains uncertain. Ongoing issues in exports and domestic demand continue to weigh heavily on the economy, with little sign of near-term improvement.

Hopes Tied to Upcoming Election and US Trade Talks

There is cautious optimism that the upcoming presidential election may bring fiscal stimulus. In the meantime, South Korea is in negotiations with the United States to secure full tariff exemptions, aiming to finalize a trade agreement by July following a 2.4% year-on-year drop in exports during mid-May.

Conclusion

South Korea is facing a critical period of economic uncertainty, driven by global trade tensions and domestic challenges. While interest rate cuts and upcoming elections may offer some relief, the road to recovery will depend heavily on successful trade negotiations and effective policy responses in the months ahead.