BoK Predicts 0.8% Growth and Anticipates 'Rate Cut' [May Monetary Policy Update]

# South Korea’s Central Bank Leaning Toward Rate Cut Over Growth Worries As the Bank of Korea's May Monetary Policy Meeting approaches, market sentiment seems notably calmer. With just four days until the meeting, analysts expect the central bank to cut its base interest rate to 2.50%, down from 2.75%. This adjustment comes as South Korea revises its 2023 GDP growth forecast to around 0.8%, reflecting weaker domestic demand and challenges in external trade, exacerbated by U.S. tariff policies. # Analysts Uniformly Anticipate Rate Cut A survey by Newsis on May 25, involving 10 South Korean market experts, revealed unanimous expectations for a 25 basis-point rate cut at the May 29 Monetary Policy Committee (MPC) meeting. This adjustment would shift the base rate to 2.50%. Experts attribute this prediction to worsening global trade conditions due to increased U.S. tariffs and weakened domestic investment and consumption. The need for monetary easing has grown amid these economic challenges. Exchange rate volatility has recently eased with the Korean won stabilizing below 1,400 per dollar. Household loans, particularly mortgage-backed debt, may see a temporary increase in the second quarter following February's relaxation of land transaction permit requirements. However, the reintroduction of broader restrictions and stricter Debt Service Ratio (DSR) regulations are expected to stabilize household debt from the third quarter onward. The Bank's prior forward guidance has strengthened confidence in a May rate cut. Previous MPC meetings have indicated a potential rate reduction within three months. Bank of Korea Governor Rhee Chang-yong reinforced this during the Asian Development Bank (ADB) meeting in Milan, stating, “Do not doubt our intention to lower rates. We will take sufficient action.” Kong Dong-rak, a researcher at Daishin Securities, emphasized the need for an accommodative monetary stance following the first-quarter GDP contraction. “The sharp economic slowdown necessitates additional monetary easing after the May rate cut. Additionally, the new administration must implement growth-stimulating policies,” he said. Kim Sang-hoon, an analyst at Hana Securities, expressed concerns about 2023 economic growth staying below 1%, citing first-quarter contraction risks and persistent uncertainties tied to U.S. tariffs. “The Bank of Korea is likely to pursue further rate cuts to address these risks,” he noted. # Anticipated Timeline and Final Rate Forecast Most experts agree that further rate cuts could come as early as August. Analysts suggest that post-May policy decisions will depend on the effectiveness of the initial rate cut, U.S. tariff policy developments, Federal Reserve actions, and domestic household debt trends. Terminal rate estimates vary between 2.00% and 2.25%, depending on South Korea’s and the U.S.'s economic trajectories. # Bank of Korea Likely to Downgrade Economic Growth Forecast to 0.8% With a May rate cut in sight, market attention has shifted to the Bank of Korea's revised economic projections. The central bank is widely expected to lower its 2023 GDP growth forecast from 1.5% to 0.8%, citing weaker domestic demand, intensified U.S. tariffs, and an unexpected first-quarter contraction. This aligns with predictions from state-backed research institutions like the Korea Development Institute (KDI). Discrepancies in external assessments of South Korea's growth have also garnered attention. While international investment banks project mid-0% growth, the International Monetary Fund (IMF) estimates just over 1%, indicating volatile market expectations. Analysts like Yoon Yeo-sam at Meritz Securities and Baek Yoon-min at Kyobo Securities forecast South Korea’s 2023 GDP growth at 0.8%. Conversely, Kim Sang-soo at Hanwha Investment & Securities and Cho Yong-ku at Shinhan Securities predict a slightly higher figure of 0.9%. Other experts, including An Jae-kyun from Shinhan Securities and An Ye-ha from Kiwoom Securities, believe growth will hover around 1%. Yu Young-sang of Korea Investment & Securities projects growth between 1.0% and 1.1%, while Kim Ji-man of Samsung Securities forecasts 1.2% to 1.3%. Yu suggested a modest rebound later in the year, emphasizing fiscal expansion efforts amid ongoing global trade negotiations. “A supplementary budget initiative of 13.8 trillion won in May and further fiscal efforts by the Democratic Party post-June should support growth. Additionally, easing tariff-related trade risks are expected to provide some economic relief,” Yu remarked.