BENGALURU : The Bank of Korea (BOK) will lower its key policy rate by 25 basis points on Thursday as economic activity contracted in the last quarter and benign inflation supports the case for easing, a Reuters poll of economists found.
BOK Governor Rhee Chang-yong signalled the possibility of a rate cut at the April meeting, days before official data showed South Korea’s economy contracted 0.2 per cent in the first quarter from the previous three months.
With inflation at 2.1 per cent in April – close to the BOK’s 2.0 per cent target – and the Korean won rebounding around 9 per cent from last month’s low, the central bank has more space to resume its easing cycle.
All 36 economists polled between May 19-25 expected the BOK to cut its base rate by 25 basis points to 2.50 per cent on May 29, a level last seen in August 2022.
“At the April meeting, policymakers strongly suggested that there would be a rate cut and the near-term growth forecasts could be revised downwards,” said Suktae Oh, chief Korea economist at Societe Generale.
“Since then, we have not seen anything in the data that would be likely to deter them. Indeed, the Q1 GDP contraction, continued uncertainty on U.S. tariffs and the decline in the USD/KRW exchange rate further support monetary easing.”
Among those who provided a longer-term outlook on rates, a strong majority of economists, 23 of 27, expected the key interest rate to fall by 50 basis points from current level to 2.25 per cent by the end of next quarter, a view broadly unchanged from the previous poll.
However, a slight majority, 15 of 27, or around 56 per cent, forecast an additional 25 basis point cut by the end of the fourth quarter, bringing the rate to 2.00 per cent, a quarter percentage point lower than in the previous poll conducted in April.
Apart from monetary easing, economists in the poll also pointed to the likelihood of fiscal support following the presidential election in early June, on top of the 13.8 trillion won ($10.1 billion) supplementary government budget approved this month.
“After lowering the (interest rate) to 2.00 per cent, we see the BOK prioritising financial stability while passing the baton for boosting growth to the government from next year,” wrote Kathleen Oh, chief Korea economist at Morgan Stanley.
The South Korean economy was expected to grow 1.3 per cent this year, a separate Reuters poll found, higher than the International Monetary Fund’s forecast of 1.0 per cent and the BOK’s projection of 1.5 per cent, which most economists said will be revised downward on Thursday.
(Other stories from the May Reuters global economic poll)
