BOK slashes growth forecast by half to 0.8%

Korea Herald

4 days ago

Korea faces slowest growth since 2009 as central bank cuts rates to spur recovery
South Korea's central bank nearly halved its economic growth projection for this year to 0.8 percent on Thursday, reflecting deepening challenges both at home and abroad. In a bid to support the struggling economy, the Bank of Korea also delivered a quarter-point base rate cut.
The revised estimate for gross domestic product growth, a key measure of economic performance, is down 0.7 percentage point from the BOK's previous forecast of 1.5 percent made in February. The downgrade factors in the 0.2 percent economic contraction in the first quarter and heightened trade risks, including US tariff actions.
If realized, this would mark the first time since 2009 that the nation's growth rate falls below 2 percent, excluding the pandemic-triggered contraction in 2020. The last instance was when the GDP rose by 0.8 percent in 2009, hit by the global financial crisis.
'The economy is facing challenges, but it's difficult to compare the current situation to that of 2008,' BOK Governor Rhee Chang-yong said at a press conference following the Monetary Policy Board meeting.
'At that time, Korea's potential growth rate was around 3 percent. Now, it has fallen to 2 percent. A 0.8 percent growth is certainly painful, but it's not a crisis on the scale of 2008.'
The BOK's revised projection aligns with recent adjustments from other institutions. The Korea Development Institute, for instance, also halved its growth outlook from 1.6 percent to 0.8 percent.
Despite the downgrade for 2025, the BOK trimmed next year's growth forecast by just 0.2 percentage point to 1.6 percent, suggesting an anticipated recovery.
'Over the past two years, construction investment has been the biggest drag on growth,' said Rhee. 'The sector had overheated during the real estate boom and is now undergoing a sharp correction, which we expect to stabilize within this year.'
The BOK maintained its inflation outlook for 2025 at 1.9 percent, signaling that consumer prices are expected to follow a stable trajectory despite slower growth.
To stimulate economic activity, the central bank lowered the base rate by 0.25 percentage point to 2.5 percent. This marks the fourth rate cut since the BOK began easing in October 2024.
All six voting members of the Monetary Policy Board supported the rate cut, excluding Governor Rhee, whose vote is not disclosed. Four of the six members were open to further easing within the next three months, while the remaining two expressed opposition.
With the latest decision, the interest rate gap between South Korea and the US has widened to 2 percentage points. However, the recent appreciation of the Korean won has helped mitigate concerns over capital outflows and foreign exchange volatility.
'The won's earlier depreciation was excessive compared to the underlying fundamentals of the Korean economy. Its current appreciation is a normalization process,' said Rhee.
Attention now turns to the US Federal Reserve's upcoming Federal Open Market Committee meeting scheduled for June 17-18. The next BOK rate-setting meeting will be held on July 10.