South Korea makes first back-to-back rate cut since 2009 as Trump trade risks loom

SEOUL - South Korea’s central bank delivered a surprise interest rate cut on Nov 28 and signalled more to come, as economic growth faltered and policymakers turned a wary eye to trade risks from a second Donald Trump presidency.

The Bank of Korea (BOK) cut benchmark interest rates for a second straight meeting to 3 per cent, an outcome only four of 38 economists polled by Reuters foresaw.

The action was also the first back-to-back rate cut since early 2009 as policymakers sought to revive growth now that inflationary pressures seem to have come under control.

Bank governor Rhee Chang-yong said three board members were open to further easing in the next three months as the return of former US president Trump clouds the outlook for South Korea’s export-reliant economy.

“Exports competition with major countries looks to be intensifying, while we also took note of uncertainties ahead on the trade environment after Trump’s election victory,” Mr Rhee said in a news conference after the decision.

Asia’s fourth-largest economy faces risks of higher tariffs, while its biggest trading partner China could potentially face tariffs of up to 60 per cent.

South Korea registered a record trade surplus of US$44.4 billion (S$59.5 billion) with the United States in 2023, bigger than that for any of its other trading partners.

For President Yoon Suk Yeol’s government, Trump’s election has also added urgency to safeguard key growth engines, including the local chip industry.

On Nov 20, the government announced plans to bolster support for local chipmakers, to help an industry that could face unfavourable policies from the upcoming Trump administration.

“Although there were two dissenters, the fact that they had three board members who are open to near-term cuts meant Rhee practically signalled more cuts are on the way, especially as he placed some emphasis on supporting growth,” said Mr Ahn Jae-kyun, an analyst at Shinhan Securities. He sees the BOK cutting again in the first quarter.

South Korea’s economy barely skirted a technical recession in the third quarter, expanding just 0.1 per cent after an earlier contraction, as a recovery in private consumption slowed and exports stalled.

The government is considering drawing up a supplementary budget early next year to counter slumping consumer spending and slowing economic growth, local media reported last week.

Asked if the bank was ready for further downward pressure on the won, Asia’s worst-performing currency this year, Mr Rhee said he would work with the government to stabilize forex market as needed.

Policymakers in New Zealand, Canada and Sweden have also lowered their benchmark rates by more than 100 points in recent months.

The BOK downgraded forecasts for both growth and inflation in 2024.

It cut 2024 growth forecast to 2.2 per cent from 2.4 per cent previously. For 2025, it sees the economy expanding 1.9 per cent, weaker than its 2.1 per cent outlook before.

It also sees consumer inflation at 2.3 per cent for this year, slower than 2.5 per cent forecast previously.

South Korea’s policy-sensitive three-year treasury bond futures rose as much as 0.22 points to 106.63 after the press conference, while the won weakened. REUTERS